1. Consider the following securities: Risky security: E(R) = 20% and \sigma = 20%. Risk-free security: Rf = 15%, which is also the borrowing rate. You want to construct a portfolio combining the risky security and the risk-free security to get an expected return of 25 % . (a) What weights would you need to put in the risky and the risk - free securities to earn an expected return of 25% ? (b) What is the standard deviation of this portfolio? (c) What is the reward-to- variability ratio? (d) Draw the capital allocation line (CAL). Label the points and the axes clearly.

1. Consider the following securities: Risky security: E(R) = 20% and \sigma = 20%. Risk-free security: Rf = 15%, which is also the borrowing rate. You want to construct a portfolio combining the risky security and the risk-free security to get an expected return of 25 % . (a) What weights would you need to put in the risky and the risk - free securities to earn an expected return of 25% ? (b) What is the standard deviation of this portfolio? (c) What is the reward-to- variability ratio? (d) Draw the capital allocation line (CAL). Label the points and the axes clearly.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Using the following information determine the expected rate of return for a risky asset using CAPM, consider the following example stocks assuming that you have already computed their betas Stocks Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that you expect the economy RFR to be 6% (0.06) The expected return on the market portfolio (E(Rm)) to be 8% (0.08) A market risk premium of (0.04). Question: What would be the SML required rate of return for the following stocks. A, B,C,D and E
Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.70 0.180 Repete Co. 1.39 0.153 What is the risk - free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places.) Risk - free rate % Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected Return on Market Pete Corp. % Repete Co. %
The risk-free rate is currently 3.3%, and the market return is 14.8%. Assume you are considering the following investments: Investment Beta A 1.54 B 1.16 C 0.51 D 0.11 E 2.14 . a. Which investment is most risky? Least risky? b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments. c. Find the security market line (SML), using your findings in part b. d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.
(c)) Discuss the following graphic, which shows the relationship between expected return and portfolio weights. The portfolio is comprised of a debt security D and an equity security E. What would the portfolio strategy be when Wp = 2 and ba WE = -1? 38 (33) -0.5 Expected Return 13% 8% Debt Fund 0 (ebenso) esenicut adol leu@ ledol (loorba (ognerloxel) Ismet tametnl Equity Fund 1.0 0 OC) becida nieu to 2.0 w (stocks) AB -1.0 68 XO.YOUTS RO w (bonds)=1-w (stocks) 15 V10 anollesup Figure 7.3 Portfolio expected return as a function of investment proportions la 21101TO
Suppose you observe the following situation: Security Ruby Pearl Expected Return 14.9% 21.0% Beta 0.70 2.13 A). If these two securities are correctly priced, calculate the risk-free rate. Round your answer to 4 decimal points. B). If these two securities are correctly priced, find the market risk premium (using the findings of Requirement-A). Round your answer to 4 decimal points. C). If the current market data shows that the risk-free rate is 3.52 percent, are these securities fairly priced? Comment on your answer. Round your answers to 4 decimal points. D). Calculate the expected return and beta of an equally weighted portfolio of these two securities. Round your answers to 3 decimal points.
Find the weights of the two pure factor portfolios constructed from the following three securities: r1 = .06 + 2F¡ + 2F, r2 = .05 + 3F, + IF, r3 = .04 + 3F, + OF, Then write out the factor equations for the two pure factor portfolios, and determine their risk premiums. Assume a risk-free rate that is implied by the factor equations and no arbitrage.
The risk-free rate is 3% and the expected rate of return on the market portfolio is 8%. a. Calculate the required rate of return on a security with a beta of 2.16. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. If the security is expected to return 13%, is it overpriced or underpriced?
Suppose you observe the following situation: Security Beta Expected Return Peat Company 1.70 13.60 Re - Peat Company 0.85 10.80 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk - free rate?
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: 8p 1.70 1.30 0.85 1.00 Portfolio X Y Z Market Risk-free Rp 11.5% 10.5 7.2 10.9 4.6 R-squared op 38.00% 33.00 23.00 28.00 0 Assume that the correlation of returns on Portfolio Y to returns on the market is 0.76. What percentage of Portfolio Y's return is driven by the market? Note: Enter your answer as a decimal not a percentage. Round your answer to 4 decimal places.
1. Suppose you have n risky assets you can combine in a portfolio. Each risky asset has an expected return of 8% and a standard deviation of 30%. The risky assets are uncorrelated with each other. (a) Consider an equally weighted portfolio of 2 of these securities. What is its expected return? What will its standard deviation be? (b) Consider an equally weighted portfolio of 30 of these securities. What is its expected return? What will its standard deviation be? (c) Suppose we let the number of these securities increase without bound. That is, n→ ∞o. What happens to the standard deviation of an equally weighted portfolio of these securities as the number of assets in the portfolio becomes extremely large? What will the riskless rate be in this case, and why? -int IDE
Mf1. Question: 1 (Assume that two securities, A and B, constitute the market portfolio, their proportions and variances are 0.39, 160, and 0.61, 340, respectively. The covariance of the two securities is 190. Estimate the systematic risk (beta) of the two securities. Note that the covariance of security-/ with the market portfolio is simply the weighted average of the covariances of security-i with all the securities included in the market portfolio.
Assume you own a portfolio of diverse securities each of which is correctly priced. Given this, the reward-to-risk ratio: of each security must equal the slope of the security market line. for the portfolio must equal 1.0. for the portfolio must be less than the market risk premium.

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