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Questions and Answers
What is the expected return from the risk-free asset?
What is the expected return from the risk-free asset?
What is the formula for the return from the combined portfolio?
What is the formula for the return from the combined portfolio?
What does the standard deviation of the risk-free asset equal?
What does the standard deviation of the risk-free asset equal?
How is the standard deviation of the combined portfolio calculated?
How is the standard deviation of the combined portfolio calculated?
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The riskier asset offers a higher expected return due to what characteristic?
The riskier asset offers a higher expected return due to what characteristic?
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What does the utility of an investment depend on?
What does the utility of an investment depend on?
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How does the coefficient of risk aversion (C) affect utility?
How does the coefficient of risk aversion (C) affect utility?
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What best describes the relationship between risk aversion and investment choices?
What best describes the relationship between risk aversion and investment choices?
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Which of the following is true about the Sharpe ratio?
Which of the following is true about the Sharpe ratio?
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Which investment alternative has the highest Sharpe ratio?
Which investment alternative has the highest Sharpe ratio?
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Which statement about inefficient investments is true?
Which statement about inefficient investments is true?
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If two investment alternatives have close Sharpe ratios, what is likely to happen?
If two investment alternatives have close Sharpe ratios, what is likely to happen?
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What influences an investor's decision to add an asset to their portfolio?
What influences an investor's decision to add an asset to their portfolio?
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What happens to utility as risk aversion increases?
What happens to utility as risk aversion increases?
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What is the consequence of having a higher risk aversion in an investment?
What is the consequence of having a higher risk aversion in an investment?
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What characterizes an indifference curve in risk-return profiles?
What characterizes an indifference curve in risk-return profiles?
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Which of the following statements is true about asset D?
Which of the following statements is true about asset D?
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Which investment strategy allows for both risky assets and risk-free assets?
Which investment strategy allows for both risky assets and risk-free assets?
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What does it mean when an asset is weakly or negatively correlated with existing assets?
What does it mean when an asset is weakly or negatively correlated with existing assets?
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What key factor should not influence the assessment of an asset's addition to a portfolio?
What key factor should not influence the assessment of an asset's addition to a portfolio?
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What must be fulfilled for an investor to consider the risk-return of different assets as equally useful?
What must be fulfilled for an investor to consider the risk-return of different assets as equally useful?
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What does a negative value of b in the EGARCH model indicate?
What does a negative value of b in the EGARCH model indicate?
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Which characteristic of the EGARCH model distinguishes it from other volatility models?
Which characteristic of the EGARCH model distinguishes it from other volatility models?
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Which statement about the Sharpe ratio is correct?
Which statement about the Sharpe ratio is correct?
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In the context of portfolio selection, what does the Markowitz approach primarily address?
In the context of portfolio selection, what does the Markowitz approach primarily address?
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What can be inferred about the portfolio with the highest expected return among the provided options?
What can be inferred about the portfolio with the highest expected return among the provided options?
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Which portfolio exhibits the highest standard deviation of excess return?
Which portfolio exhibits the highest standard deviation of excess return?
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What does the quadratic utility function represent in the context of investment decisions?
What does the quadratic utility function represent in the context of investment decisions?
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If a portfolio has an expected return of 0.05 and a standard deviation of excess return of 0.09, what is its Sharpe ratio?
If a portfolio has an expected return of 0.05 and a standard deviation of excess return of 0.09, what is its Sharpe ratio?
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Study Notes
EGARCH Model
- The EGARCH model, similar to the GJR-GARCH model, reflects volatility asymmetry.
- Negative shocks have a larger impact on future volatility compared to positive shocks of equal magnitude (if b < 0).
- This model doesn't require constraints on coefficients, allowing them to be negative due to the log function.
- EGARCH models account for leptokurtic conditional variance.
Chapter 4: Utility and Indifference Curves
- Choosing between investment options is difficult.
- The Sharpe ratio can indicate expected reward per unit of risk, but further personal preference needs to be assessed
- The Markowitz portfolio selection method separates personal preferences from objective portfolio optimization.
- Portfolio A to E provide examples with varying risk levels, expected return, excess return standard deviation, and respective Sharpe ratios
Portfolio Analysis
- Investor preferences heavily influence investment choices.
- Quadratic utility functions (U = E(r) - c.σ²) guide decision-making, where:
- U = Utility
- E(r) = Expected return
- σ² = Variance of return
- c = Risk aversion coefficient (higher c = higher risk penalty)
- Utility depends on the expected return and its associated risk (measured by standard deviation).
Investor Preferences and Sharpe Ratios
- Higher risk aversion leads investors to prefer investments with lower returns and lower risk.
- The choice of investment does not solely depend on the Sharpe ratio, but also risk aversion
- It is difficult to compare investment options that are close together in terms of risk and return
- An investment with low Sharp ratio can still be preferred over another if its risk and return are more suitable to the investor
Capital Allocation Line
- Investments can be in risk-free or risky assets.
- A risk-free asset has a standard deviation of zero.
- The expected return and standard deviation of a risky investment is calculated
- Investors must decide how much of their wealth goes into risk-free and risky investments to optimize their portfolios.
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Description
Explore Chapter 4 discussing the EGARCH model's asymmetry in volatility and its implications for investment strategies. Learn about utility and indifference curves in portfolio selection, and see how different investment options can be evaluated using the Sharpe ratio. This quiz will test your understanding of key concepts in finance and investment analysis.