IPT 1 Chapter 6

Question 1

What is the difference between gambling and speculation?

Answer 1

A gamble is the asumption of risk for the enjoyment and speculation is undertaken as one perceives a favorable risk-return trade-off.

Question 2

What are the different scores of risk aversion?

Answer 2

1. A<0 risk-lover
2. A = 0 risk-neutral
3. A > 0 risk-averse

Question 3

What does the capital allocation line do?

Answer 3

Depicts all risk-return combinations of portfolios resulting from different values of y available to investors

Question 4

What is the capital market line?

Answer 4

Capital allocation line for an investment in a well-diversified portfolio of common stock and represent a passive investment strategy