Class Assignment 9 - Risk and Return 2 - 221.docx

What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (SDi), covariance (COVij), and asset weight (Wi) are as shown below? Asset (A) E(R₂) = 25% SDA = 18% WA = 0.75 COVA, B = -0.0009 Select one: A. 13.65% B. 20 U ODN 20.0% C. 18.64% D. 22.5% Asset (B) E(R₂) = 15% SDB = 11% WB = 0.25

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Vijay

What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (SDi), covariance (COVij), and asset weight (Wi) are as shown below? Asset (A) E(R₂) = 10% SDA = 8% WA = 0.25 COVAB = 0.006 Select one: A. 13.75% B. 7.72% C. 12.5% D. 8.79% Asset (B) E(RB) = 15% SDB = 9.5% WB = 0.75

Question 7 The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 0.4 0.45 o(R) [a]H 0.3 0.25 0.2 0.15 0.1 0.05 0 0 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. Figure (1) shows an investor with a conservative investment behavior. 0.05 0.1 0.15 In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. Figure 2 0.2 0.25 o (R) 0.3 0.35 0.4 0.45

Vijay

Question 17 Consider the following graph of the efficient frontier.     Which of the following portfolios is attainable and efficient?     Portfolio G     Portfolio E     Portfolio A     Portfolio D

Q. Market rate of return is 18%, risk-free rate of return 8% and beta is 1.2 1. Calculate the required rate of return 2. Calculate risk premium

QUESTION 4 Below are three different investment alternatives, along with information on their expected return and return standard deviation. Suppose investors have the following utility function: U = E(R) - 12 Ao² The coefficient of risk aversion (A) for Alice is 1.5, and that for John is 2.5. Which investment will each investor pick? (hint: Find the investment giving the investor the highest utility level). Investment Expected Return E[r] Standard Deviation o 0.10 0.02 0.25 0.05 0.30 0.15 0.35 0.40 For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). 2 3

Baghiben

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Question 7 Consider the following Information: Portfolio ER Risk Free Market SD 6.00 13.2 A 11.2 a. Calculate the Sharpe ratios for the market portfolio and portfolio A Sharpe Ratio=(Return on portfolio-Riskfreerate)/SD Market Portfo 0.2 Portfolio A 0.21 2.1 b. If the simple CAPM is valid, is the above situation possible? 0.00 36 25 Beta Market Beta A

Portfolio theory with two assets E(R1)=0.15 E(01)= 0.10 W1=0.5 E(R2)=0.20 E(02) = 0.20 W2=0.5 Calculate the expected return and the standard deviation of the two portfolios if r1,2 = 0.4 and -0.60 respectively.

Nikul

Consider the following two securities X and Y. Y Security Expected Return Standard Deviation Beta 12.5% 10.0% Risk-free asset 5.0% OA. 1.33 ○ B. 0.88 OC. 1.17 OD. 1.67 20.0% 1.5 30.0% 1.0

Baghiben

Question 3 What is the Sharpe ratio for portfolio B? Round off your answer to three digits after the decimal point, as in 1.234.

Baghiben

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Which asset in the following table has the most market risk (also known as systematic or non- diversifiable risk)? Asset A B Asset B Asset A Return Both Assets A and C Asset C (10% 12% 14% Beta 0.74 1.00 1.25 Standard Deviation 20% 40% 30%

Problem 5 Assume that you manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate (risk-free rate) is 7%. Your client chooses to invest 70% in the risky portfolio in your fund and 30% in a T-bill money market fund. We assume that investors use mean-variance utility: U = E(r) – 0.5 x Aa?, where E(r) is the expected return, A is the risk aversion coefficient and o? is the variance of returns. a) What is the expected value and standard deviation of the rate of return on your client's portfolio? b) What is the reward-to-volatility ratio (Sharpe ratio) of your risky portfolio? What is the reward-to-volatility ratio (Sharpe ratio) of your client's risky portfolio? Comment on the relationship between these two Sharpe ratio calculated and explain the intuition behind. c) Draw the Capital Allocation Line (CAL) of your portfolio on an expected return- standard deviation diagram. What is the slope of the CAL? Show the position of your…