Assume that the risk-free rate is 5.5 and the market risk premium ...

[ts19998]

Assume that the risk-free rate is 5.5 and the market risk premium is 6. A portfolio manager has 10 million invested in a two-asset portfolio that has an (equilibrium) expected return of 12.
 
  The manager plans to sell 3 million of Stock A with a beta of 1.6. She plans to reinvest this 3 million into Stock B that has a weight of 0.70. What is the (equilibrium) expected return of her new portfolio?
  A) 8.28
  B) 10.38
  C) 10.52
  D) 10.90
  E) 11.31

Question 2

Define risk. Give an example of a risk-free investment and explain why you claim it has no risk. Give an example of a risky investment and explain why you claim the investment to be risky.
 
  What will be an ideal response?

[blakcmamba]

Answer to Question 1

B

Answer to Question 2

Answer: Risk is a measure of the uncertainty in a set of potential outcomes for an event in which there is a chance of some loss. The typical risk-free investment example is Treasury bills because the investor knows with certainty the amount and timing of the investment payoff. In all states of the world, an investor in Treasury bills will receive the face value of the investment. Risky investments have uncertain outcomes. Stocks, bonds, commodities, real estate, and many other types of investments provide uncertain returns. Some investments have returns that vary only by small amounts across states of the world, while others vary much more from very negative to very positive.