Investments exam 2

Risk averse

Require risk premiums for risky investments

Utility scores are aligned based on ________

Expected return and standard deviation

Utility score

The risk of an individual asset is evaluated relative to the investor’s portfolio

Ex post

Historical returns observed exactly

Ex ante

Expected returns described in probability distributions

Capital allocation decision

The proportion of the investor’s complete portfolio in risky and risk-free assets

Asset allocation decision

Distribution of risky investments across broad asset categories

Security selection decision

The choice of individual securities within each asset class

Risk-free assets

Treasury securities or possibly money market securities

Risky asset

Any asset or portfolio for which the standard deviation is greater than 0

Complete portfolio

Includes both risk-free and risky assets

CAL »»» CML

When the risky asset is a broadly diversified portfolio of financial assets

Capital market line

Shows expected return risk opportunities available from a passive investment strategy

Greater levels of risk aversion lead to ________

Larger proportions of the risk free rate

Lower levels of risk aversion lead to ________

Larger proportions of the portfolio of risky assets

All risk is ________

Firm specific

Some risk is ________

Systematic

A portfolio is efficient if ________

It provides the highest expected return among portfolios with the same risk (standard deviation) or if it provides the least amount of risk among all portfolios with the same expected return

The smaller the correlation the _________

Greater the risk reduction potential

The choice of a portfolio from the efficient frontier depends on _________

The individual investor’s aversion to risk

Lending or borrowing at the risk free rate allows us to ________

Exist outside the efficient frontier

The optimal combination of lending and borrowing (efficient frontier)

Linear

The optimal risky portfolio has the ________ RV ratio

Highest

Choose portfolio allocations that produce _________

Maximum RV ratio