Homework 4

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University of Texas, Rio Grande Valley *

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Finance

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Jan 9, 2024

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Joey Danielle Ashton Sebastian Chapter 4 Homework Assignment 1. Compare the volatility of equity returns over short, medium, and long time horizons. Short-time horizons often last a few days or weeks, and are high in volatility. Since the time period is a very short window, we can't logically expect specific returns, so relying on the stock market would not be appropriate. Annualized returns equal lower percents compared to medium and long time-horizons Medium time horizons usually last weeks to a few years. Volatility is usually moderates compared to short term. Market fundamentals and economic impacts have more influence on medium time-horizons. Annualized returns are usually shorter than STH, but not longer than LTH. Long Time-horizons often last a few years to decades .Vitality is usually short term compared to MTH and STH. They often have higher return percentages and have less chance of obtaining cumulative negative return compared to shorter time horizons. 2. Explain how to determine portfolio return and risk. Return: First you would need to calculate and gather the information from your portfolio. You would then weight the portfolio's holdings by the expected returns on an asset . You would add the weight percentages multiplied by the expected return percentages. Risk: People usually measure the risk with standard deviation. First you need to gather all the information from your portfolio, then you use SD, which measures the data around a mean or expected value.. A large deviation basically makes more risk, while the opposite means lower risk. 3. Differentiate between efficient and inefficient portfolios. You must construct a efficient frontier from all investment risky assets using assets means, variance, and covariance with other assets. Any return combinations above the efficient frontier are efficient, while any below the line are efficient. Efficient portfolios are those that offer the highest expected return, while inefficient returns are those with low expected returns. 4. Describe Optimal portfolio for an investor. Building an optimal portfolio involves a combination of asset allocation, diversification, and risk management strategies tailored to the investor's financial goals, risk tolerance, and time horizon. An optimal portfolio for an investor is a carefully constructed mix of investments that aims to achieve the highest possible return for a given level of risk or, conversely, the lowest possible level of risk for a given expected return.

Joey Danielle Ashton Sebastian Chapter 4 Homework Assignment 5. Discuss the CAPM (Capital Asset Pricing Model). The Capital Asset Pricing Model (CAPM) is a widely used financial theory and valuation model that helps investors and analysts determine the expected return on an asset or a portfolio. Developed by William F. Sharpe, John Lintner, and Jan Mossin in the early 1960s, CAPM provides a framework for understanding how risk and return are related in the context of investing. It's an essential tool for both individual and institutional investors. 6. Explain the concept of risk tolerance. Risk tolerance is a crucial concept in finance and investing that refers to an individual's or an entity's willingness and ability to endure uncertainty and potential loss in pursuit of financial gains. It is a subjective assessment that varies from person to person and is influenced by various factors, including an individual's financial goals, investment horizon, personal circumstances, and emotional disposition. 7. Differentiate between strategic and tactical asset allocation. Strategic asset allocation is a diversification strategy across a broad set of asset classes in an effort to minimize the probability of substantial losses in one investment category significantly impacting the performance of the portfolio as a whole. On the other hand, tactical asset allocation attempts to outperform the market over shorter periods of time by placing investment dollars in those asset classes that the investor expects will outperform market returns over the period. 8. Explain the difference between the Security Market Line and the Capital Market Line. The Security Market Line shows the expected return of an asset in equilibrium given its level of systematic risk as measured by its beta, helping investors assess whether a particular stock’s returns compensate for its risk.. Unlike the Capital Market Line which is when all investors have similar expectations, the capital market line shows all efficient combinations of risk-free asset and market portfolio, which represents 100% risky assets. In conclusion, SML is specific to individual securities, and the CML addresses portfolio-level risk and return.

Joey Danielle Ashton Sebastian Chapter 4 Homework Assignment 9. Describe the importance of the lending and borrowing portfolios for investors who are trying to locate their personal optimal portfolios. The importance of lending and borrowing portfolios for investors in finding their personal optimal portfolios lies in their role in balancing the overall portfolio. Lending provides a secure avenue to generate a risk-free return, acting as a crucial anchor for investors, especially during volatile market conditions. On the other hand, borrowing allows investors to leverage their investments, potentially increasing returns but also heightening risk. By strategically combining these lending and borrowing components within a diversified portfolio, investors can fine-tune the risk-return trade-off to align with their unique financial goals and risk tolerance. 10. Explain how the Arbitrage Pricing Theory ( APT) adds value to the investors understanding of asset pricing. The APT system adds value to investors by creating a financial model that establishes a linear relationship to calculate expected returns by assessing macroeconomic variables of systematic risk in securities and investments. The goal of the model is to capture stock that could have been undervalued in some way. This model could aid in building better portfolios with higher returns than utilizing index funds which are less risk averse.

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Q1)VaR can be defined as the minimal loss of a financial position during a given time period for a given probability. true or fslse Q2 Stocks tend to move together if they are affected by ________. common economic events events unrelated to the economy idiosyncratic shocks unsystematic risk Q3)Beta can be viewed as a measure of systematic risk TRUE OR FASE

Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? A. The average rate of return is significantly greater than zero. B. The correlation between the return during a given week and the return during the following week is zero. C. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall. D. One could have made higher-than-average capital gains by holding stocks with low dividend yields.

please quickly 11 In an efficient market: A.Prices are constant over the short-term. B.The risk premium on all securities will diminish to zero. C.All investors are guaranteed a positive return. D.Prices react quickly and correctly to new information. E.Risks for investment are low.

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Financial Accounting Question need help

QUESTION 1 Exhibit 5.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Stock Rit Rmt ai Beta A 10.6 15 0 0.8 Z 9.8 8.0 0 1.1 Rit = return for stock i during period t Rmt = return for the aggregate market during period t Refer to Exhibit 5.5. What is the abnormal rate of return for Stock A during period t using only the aggregate market return (ignore differential systematic risk)? a. 4.40 b. −1.70 c. 3.40 d. −4.40 e. −1.86

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Consider the following information: a. Calculate the expected return for the two stocks. Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. b. Calculate the standard deviation for the two stocks. Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.

An estimation by marginal investor, a higher expected return is earned on A. more risky securities B. less risky securities C. less premium D. high premium (Don't use chatgpt otherwise give 10 downvotes)

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