1. Consider the table below which lists a set of portfolios with each of their expected return E(R) and risk measured by the standard deviation: Portfolio E(R) % 1 2 3 4 5 6 7 8 5 6 9 Standard Deviation % 16.4 12.5 14.3 15 14 15.1 16 17.4 20.3 22.5 16.8 19 20 Assume that the portfolio is composed of 5 different types of assets, and the risk free rate (rf) is 1.5%. Answer the following set of questions. (a) Plot the set of portfolios from the table above, and create the efficient frontier. Fully label the plot, including the global minimum variance portfolio. What do the two end points of the efficient frontier represent? (b) Consider a portfolio that provides an expected return of 13% and risk of 16.8%. Is this portfolio efficient? Explain. (c) Draw the capital market line and label the optimal portfolio. How do we determine the optimal portfolio? (d) A fund manager is considering a few other securities to add into the construction of portfolios. Below are the 3 securities the manager is considering: Security A B C E(R) % 15 28.6 8 Risk % 14 27.5 2 Beta Market Cap. (billions of $) Book to Market Ratio 2.4 1.2 3.4 0.78 500 2.6 51.3 0.45 1.2 Consider the Fama-French 3 factor model. Discuss in details the differences in these securities, and what the Fama-French model suggests regarding each of these securities relative to the optimal portfolio you found in c.).
1. Consider the table below which lists a set of portfolios with each of their expected return E(R) and risk measured by the standard deviation: Portfolio E(R) % 1 2 3 4 5 6 7 8 5 6 9 Standard Deviation % 16.4 12.5 14.3 15 14 15.1 16 17.4 20.3 22.5 16.8 19 20 Assume that the portfolio is composed of 5 different types of assets, and the risk free rate (rf) is 1.5%. Answer the following set of questions. (a) Plot the set of portfolios from the table above, and create the efficient frontier. Fully label the plot, including the global minimum variance portfolio. What do the two end points of the efficient frontier represent? (b) Consider a portfolio that provides an expected return of 13% and risk of 16.8%. Is this portfolio efficient? Explain. (c) Draw the capital market line and label the optimal portfolio. How do we determine the optimal portfolio? (d) A fund manager is considering a few other securities to add into the construction of portfolios. Below are the 3 securities the manager is considering: Security A B C E(R) % 15 28.6 8 Risk % 14 27.5 2 Beta Market Cap. (billions of $) Book to Market Ratio 2.4 1.2 3.4 0.78 500 2.6 51.3 0.45 1.2 Consider the Fama-French 3 factor model. Discuss in details the differences in these securities, and what the Fama-French model suggests regarding each of these securities relative to the optimal portfolio you found in c.).
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
Problem 9PROB
Related questions
Question
Transcribed Image Text:1. Consider the table below which lists a set of portfolios with each of their expected return E(R) and
risk measured by the standard deviation:
Portfolio
E(R) %
1
2
3
4
5
6
7
8
5
6 9
Standard Deviation %
16.4
12.5 14.3
15 14 15.1 16 17.4 20.3 22.5
16.8 19
20
Assume that the portfolio is composed of 5 different types of assets, and the risk free rate (rf) is 1.5%.
Answer the following set of questions.
(a) Plot the set of portfolios from the table above, and create the efficient frontier. Fully label the
plot, including the global minimum variance portfolio. What do the two end points of the efficient
frontier represent?
(b) Consider a portfolio that provides an expected return of 13% and risk of 16.8%. Is this portfolio
efficient? Explain.
(c) Draw the capital market line and label the optimal portfolio. How do we determine the optimal
portfolio?
(d) A fund manager is considering a few other securities to add into the construction of portfolios.
Below are the 3 securities the manager is considering:
Security
A
B
C
E(R) %
15
28.6 8
Risk %
14
27.5 2
Beta
Market Cap. (billions of $)
Book to Market Ratio
2.4
1.2 3.4 0.78
500 2.6 51.3
0.45
1.2
Consider the Fama-French 3 factor model. Discuss in details the differences in these securities, and
what the Fama-French model suggests regarding each of these securities relative to the optimal
portfolio you found in c.).
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