In accordance with the Coursera Honor Code, I (Amanda Milligan) certify that the answers here are my own work.
Question 1
(5 points) Shareholders of Exxon Oil Company face a variety of risks in holding its shares. If the economy falters, people tend to travel less and so there is less demand from the airlines industry for Exxon's fuels. This type of risk that Exxon's shareholders bear is
Specific/Idiosyncratic Risk.
Systematic/Market Risk.
Question 2
(5 points) Suppose there are three securities (X, Y, and Z) to choose from, and next year the economy will be in an expansion, normal, or recession state with probabilities 0.30, 0.35, and 0.35, respectively. The returns (%) on the securitiies in these states are as follows: Security X {expansion = +10, normal = +8, recession = +6}; Security Y {+25,+10,-10}; Security Z {+7.5,+7.5,+7.5}. If the investor is risk neutral and must choose whether to invest in Security Y or Security Z, which would she buy?
Indifferent between Y & Z.
Security Y.
Security Z.
Question 3
(5 points) Suppose your dear old Grandfather approaches you for investment advice. He knows of your great training in finance and statistics and gives the following instructions: "I have lived a long time and through many challenges. But the recent financial upheaval, with its ups and downs, is too much for me to bear. Just pick for me a portfolio with the least risk." Suppose there are portfolios (A, B, and C) to choose from, and next year the economy will be in an expansion, normal, or recession state with probabilities 0.40, 0.40, and 0.20 respectively. The returns (%) on the portfolios in these states are as follows: Portfolio A