20. Assume you have the following table. If you know that the Risk free rate (rf) is 6%, what is the reward to volatility (Sharpe Ratio)? Scenario Probability HPR Good 0.3 10% Average 0.5 9% Bad 0.2 -10% A) (6.44%) O B) 7.5% C) 3.5% D) 6.2% E) None of the above

Q: #2 #3 #4 00 #1

A: We need to determine the Utility of each of the Investment by inputting the values. Then we can…

Q: 2. Suppose that three stocks (A, B, and C) and two common systematic risk factors (1 and 2) have the…

A: Expected Return on stock :The expected return is the profit or loss that an investor expects or…

Q: 4. Suppose that there are 2 assets with ri 012 = 0.005. = 0.20, 01 = = 0.40, 2 = 0.10, 02 = 0.25 and…

A: The objective of the question is to calculate the market portfolio return and variance, and the…

Q: Which one of the following statements is correct?   Multiple Choice   The risk-free rate of return…

A: The correct answer is "The higher the expected rate of return , the wider the distribution of…

Q: Question 5. You can invest in two risky assets, r₁ and r2 and one risk-free asset, r. The two risky…

A: The optimal portfolio can be found by solving the mean-variance optimization problem: Maximize:…

Q: Consider the following two securities X and Y. Security Return Standard Deviation X 20.0% Y 10.0%…

A: Systematic risk is the market risk which is non-diversifiable in nature. It applies to all the firms…

Q: Based on the following table, compute the reward-to-risk ratio for security Pearl if the risk-free…

A: Security Beta Expected return Pearl 0.9 17% Emerald 1.2 17%

Q: Suppose you observe the following situation: Security               Beta              Expected…

A: Select information are available about the two stocks. We have to find out the market return and…

Q: Give the following true population SIM (not estimated SIM): Ri-Rf=0.1%+1.2(Rb-Rf)+ϵi When estimating…

A: The Single Index Model is a statistical technique used in finance to analyze and predict the…

Q: 7) A) B) C) D) E) F) An investment was made into account which earned interest that was compounded…

A: Solution:- When an amount is invested somewhere, it earns interest on it. The amount initially…

Q: Consider the following payoff table: DA: Decision Alternative. State of Nature Decision Alternative…

A: It is a case of expected cash flows for different alternatives, based on different economic…

Q: On the basis of the utility formula below, which investment would you select if you were risk averse…

A:

Q: Problem 4. Consider two scenarios, wi with probability and wa with probability Suppose that the…

A: Here, w1 is 1/4 or 25% w2 is 1/4 or 75% K1w1 of first security is -2% K1w2 of first security is 6%…

Q: Assume an investor with the coefficient of risk aversion A=5.5. To maximize her expected utility,…

A: Utility functions are used to measure the risk-reward tradeoff as the maximum return that a person…

Q: If the risk premium to beta ratio of GOOG is 2 while the ratio of APPL is 3, what will happen?

A: Treynors ratio: Treynors ratio is used to measure the performance of the company. It is the ratio of…

Q: Below are three different investment alternatives, along with information on their expected return…

A: A utility function in economics and decision theory represents an individual's or entity's…

Q: If the simple CAPM is valid, which of the following situations are possible? Explain. Consider each…

A: The CAPM states that the expected return of a security is equal to the risk-free rate of return plus…

Q: What is a beta coefficient, and how are betas used in risk analysis? Do the expected returns appear…

A: Estimated rate of return is the rate of return which an investor expects to generate from the…

Q: Assume you have an optimal risky portfolio with an expected return of 17% and a standard deviation…

A: Given: Expected return = 17% Standard deviation = 27% Risk free rate = 5% Risk aversion = 2

Q: Suppose the CAPM is true. Consider two assets, X and Y, and the market M. Suppose cov(X,M) = .3,…

A: Honor code: Since you have posted a question with multiple sub-parts, we will solve the first three…

Q: Consider the following information (Assume that Security M and Security N are in the same financial…

A: Systematic risk is also known as non-diversifiable risk, and it exist for entire market. It arises…

Q: Consider the following linear regression model: (R₁-r) = a + b(RMkt - rf) + e; The b, in the…

A: In the this linear regression model (Ri-rf) =  + bi(RMkt -rf) + ei, Ri is the expected return of…

Q: Think about whether a risk-free asset should earn a risk-premium beyond the risk-free rate.…

A: The risk free asset will reflect an asset which has eliminated all the risk and which does not have…

Q: Suppose the utility function is U = E(r) - 0.5Ao2. Draw the indifference curve corresponding to a…

A: A = 3U = 0.2To draw the indifference curve for an investor with a utility function U = E(r) -…

Q: 5. There are three risky assets with rates of return r₁, 72, and r3, respectively. The covariance…

A: To find the global minimum-variance portfolio and the optimal portfolio with risky assets, as well…

Q: The market has three risky assets. The variance-covariance matrix of the risky assets are as…

A: A portfolio refers to a set of assets that provide their holder with a return for their investment…

Q: Example of CAPM Equation: Case Risk free Rate (Rf) Market return (Km) Beta (b)  Required Return A…

A: As per CAPM,  the required rate of return is E(R) = Rf + β (Rm – Rf) Rf= Risk free rate of return β…

Q: Supposing the return from an investment has the following probability distribution   Return…

A: Expected return: The entire amount of money an investor anticipates making or losing on a specific…

Q: Draw the indifference curve in the expected return–standard deviation plane corresponding to a…

A: The mathematical equation for calculating expected return: E(r) =Expected return U= Utility A=…

Q: state H M L 1. The expected payoff of A is: 2. The standard deviation of A is: 3. If the price of A…

A: Standard deviation is the measure of risk and volatility of the return of the stock and it measures…

Q: If the beta of Asset A is 2.2, the risk free rate is 2.5%, and the expected return on Asset A is 8%,…

A: Expected return on market refers to the money that is invested for expecting to make an investment…

Q: Given the following probability and the standard deviation of returns for Security J? The answer…

A: A statistical measure that represents the variation in the return on the stock is term as the…

Q: 6. On the basis of the utility formula below, which investment would you select if you were risk…

A: Utility Formula : U = E(r)-0.5×A×σ2 where: U = utility E(r) = Expected return of the portfolio A =…

Q: What is the Beta of Intrinsic Co.? Probability 0.48 0.35 0.17 a) 1.39 Ob) 1.13 c) 1.00 d)

A: Portfolio beta is a measure of an investment portfolio's overall volatility or systematic risk…

Q: 9. A risk averse, wealth maximising, investor is faced with a choice between four investments (P, Q,…

A: concept. Risk aversion is the tendency to avoid risk . Risk-averse investors prioritize the safety…

Q: 30. Gamma: Look at the following chart. Based only on this information, which underlying equity is…

A: Gamma is helpful in measuring the sensitivity of an option's delta prone to changes in the…

Q: Consider the following information (Assume that Security M and Security N are in the same financial…

A: Total risk is the combination of systematic risk and unsystematic risk. Systematic risk is that part…

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.