Within the Single Index Model paradigm, which of the following would contribute to higher overall risk for a security? O Higher beta O Lower alpha Lower market variance O Lower variance of residuals
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- According to modern portfolio theory, pair-wise covariance is more important to total portfolio risk than individual security variance. True or Falsea)define market risk. b)define delta-hedged position and describe delta hedging. c)describe gamma hedging and vega hedging. d)define and explain value at risk (VAR). e)describe the analytical (variance-covariance) method of calculating VAR, and discuss its advantages and disadvantages.The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk. Multiple Choice lower; lower lower; higher higher; lower higher; higher
- One important assumption behind portfolio theory is that investors are “mean-variance maximizers.” What is the meaning of this? Explain why this assumption is important in the delineation of the efficient frontier.Some financial theorists consider the variance of the distribution of expected rates of return to be a good measure of uncertainty. Discuss the reasoning behind this measure of risk and its purpose.When calculating the beta of security by running a simple regression in Excel, which of the following is NOT true? O The alpha or intercept coefficient in the output table measures by how much the security outperformed the market index, adjusted for risk. O The beta can be found in the X Variable coefficient cell in the output table. O The market index should be used as the 'dependent' variable Y. The returns for the security should be the 'independent' variable X. O If the R-Square in the output table is .20, that means that 20% of the variation in the dependent variable can be explained by variations in the independent variable.
- What happens to the SML graph when risk aversion increasesor decreases?A plot/graph of the positive relation between systematic risk and expected return is called: O security market line standard deviation and width of the normal distribution O covariance graph O capital asset pricing modela) Discuss the difference between a price-weighted index and a value-weighted index. Give one example for the price-weighted index and one example for the value-weighted index and discuss any problems/advantages associated with the specific indices. b) We assume that investors use mean-variance utility: U = E(r) – 0.5 × Ao², where E(r) is the expected return, A is the risk aversion coefficient and o? is the variance of returns. Given that the optimal proportion of the risky asset in the complete port- folio is given by the equation y* = E , where r; is the risk-free rate, E(rp) is the expected returm of the risky portfolio, o, is variance of returns, and A is the risk aversion coefficient. For each of the variables on the right side of the equation, discuss the impact of the variable's effect on y* and why the nature of the relationship makes sense intuitively. Assume the investor is risk averse. Ao
- How does standard deviation and variance affect portfolio risk, more so than expected return?The Sharpe ratio Select one: O is computed using idiosyncratic risk only is computed using systematic risk only Ois maximized for the risk-free asset is the highest for a minimum variance portfolio is the same along the capital market line5. Under what circumstances will the coefficient of variation of a security's returns and the standard deviation of that security's returns give the same relative measure of risk when compared with the risk of another security?