A Highly Risk-Averse Investor Is Considering the Addition of an Asset

question 94

Multiple Choice

A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio.The two securities under consideration both have an expected return equal to 15 percent.However,the distribution of possible returns associated with Asset A has a standard deviation of 12 percent,while Asset B's standard deviation is 8 percent.Both assets are correlated with the market with ρ = 0.75.Which asset should the risk-averse investor add to his/her portfolio?

• A) Asset A.
• B) Asset B.
• C) Both A and B.
• D) Neither A nor B.
• E) Cannot tell without more information.

Calculate and interpret the Mean Square Error (MSE) in the context of ANOVA.

Identify the types and characteristics of experimental designs, including completely randomized and factorial designs.

Understand the concept of degrees of freedom in the context of ANOVA.

Distinguish between different elements of ANOVA, such as factors, treatments, and replications.

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Definitions:

Least Squares Line

A straight line that best fits the data points of a scatter plot, minimizing the sum of the squares of the vertical distances of the points from the line.

Covariance

Covariance is a measure that indicates the extent to which two random variables change in tandem. A positive covariance means that the variables tend to move in the same direction, while a negative covariance means they move inversely.

Least Squares Line

A straight line that minimizes the sum of the squares of the differences between observed and theoretical values.

Scatter Diagram

A graphical representation of two variables that shows how much one variable is affected by another by displaying data points on a horizontal and vertical axis.