3. On a market at equilibrium stocks A (ß-1.2) and B (ß-0.7) offer returns of 15% and 10%, respectively. The standard deviation of the market index is 25%. An investor with a total budget of 120000 lei will buy 960 A shares for 48000 lei, 3600 B shares for 36000 lei, the difference being invested in stock C. The specific risk of this portfolio is zero and the variance of portfolio's returns is 8.1225%. a. Compute the rate of return on the portfolio b. The manager of company A decides to invest 40% of the annual EPS in projects that generate a return of 20% per year. EPS is in value of 10 lei. How will the price of the stock change? c. The manager of company B will implement a project that demands for an investment of 3.5 lei per share and generates over the next 20 years cash-flows of 1.1 lei per share. What is the impact on the stock's price?

3. On a market at equilibrium stocks A (ß-1.2) and B (ß-0.7) offer returns of 15% and 10%, respectively. The standard deviation of the market index is 25%. An investor with a total budget of 120000 lei will buy 960 A shares for 48000 lei, 3600 B shares for 36000 lei, the difference being invested in stock C. The specific risk of this portfolio is zero and the variance of portfolio's returns is 8.1225%. a. Compute the rate of return on the portfolio b. The manager of company A decides to invest 40% of the annual EPS in projects that generate a return of 20% per year. EPS is in value of 10 lei. How will the price of the stock change? c. The manager of company B will implement a project that demands for an investment of 3.5 lei per share and generates over the next 20 years cash-flows of 1.1 lei per share. What is the impact on the stock's price?

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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Similar questions

Stock 1 has an expected return of 4% and a standard deviation of 38 %. Stock 2 has anexpected return of 11% and a standard deviation of 23 % . Their correlation is .17. You invest30% in stock 1 and 70% in stock 2. What is the variance of the portfolio?What is the standarddeviation of the portfolio?
In an economy where the Capital Asset Pricing Model(CAPM) holds, the riskfree interest rate is 1%. The expected return of the market portfolio is 16% and its standard deviation is 20%. Suppose there is a portfolio with expected return of 25%. What should be its standard deviation? Select one: a.31.25% b.30% c.32% d. Insufficient information to determine the answer.
d. Consider a well-diversified portfolio made up of stocks with the same beta as Intel. What are the beta and standard deviation of this portfolio’s return? The standard deviation of the market portfolio’s return is 20%. e. What is the expected rate of return on each stock? Use the capital asset pricing model with a market risk premium of 8%. The risk-free rate of interest is 4%.
the CAPM world, the average investor’s risk aversion parameter is 2 and the standard deviation of the market portfolio is 23%. The risk-free rate is 3.5%. What is the expected return on the market portfolio?
Assume for parts (a) to (h) that the Capital Asset Pricing Model holds. The marketportfolio has an expected return of 5%. Stock A’s return has a market beta of 1.5, anexpected value of 7% and a standard deviation of 10%. Stock B’s return has amarket beta of 0.5 and a standard deviation of 20%. The correlation between stockA’s and stock B’s return is 0.5.Required:a) Explain the term ‘capital asset pricing model.’b) What is the risk-free rate?c) What is the expected return on stock B?d) Draw a graph with expected return on the y-axis and beta on the x-axis. Indicate the approximate position of the risk-free asset, the market portfolio and stocks A and B on this graph. Draw the line, which connects these four points.e) Explain the term ‘Securities Market Line’, and what is the slope of the SML for this economy?f) Consider a portfolio with a weight of 50% in stock A and 50% in stock B. What are its variance and expected return?g) Where would under-priced and over-priced securities plot on…
d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (B¡) = "PIM , where ơị,ɑm are standard deviations of asset i and market OM portfolio, Pim is the correlation between asset i and the market portfolio)
2. You are designing a risky portfolio based on two stocks, A and B. A has expected return of 15% and standard deviation of return 20%. B has expected return of 20% and standard deviation of return 10%. The correlation coefficient between A and B is 0.5. The risky free rate of return is 8%. The proportion of the optimal risky portfolio that should be invested in A is?
Consider a portfolio that offers an expected rate of return of 11% and a standard deviation of 26%. T-bills offer a risk-free 7% rate of return. What is the maximum level of risk aversion for which the risky portfolio is still preferred to T-bills? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39 %. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of returns on the optimal risky portfolio is Multiple Choice 25.5% 22.3% 21.4% 20.7% O 11:18PM 20/200
Consider a position consisting of 200,000 investment in asset A and 300,000 investment in asset B. Assume that the daily volatility of the assets are 1.5% and 1.8% respectively, and that coefficient of correlation between their returns is 0.4. What is the five day 95% VAR for the portfolio (given 95% confidence level represents 1.65 standard deviations on the left side of the normal distribution)?
You manage a risky portfolio with an expected rate of return of 13% and a standard deviation of 34%. The T-bill rate is 2%. Stock A Stock B Stock C 45% 32% 23% Suppose that your client decides to invest in your portfolio a proportion y of the total investment budget so that the overall portfolio will have an expected rate of return of 11%. Required: a. What is the proportion y? b. What are your client's investment proportions in your three stocks and the T-bill fund? c. What is the standard deviation of the rate of return on your client's portfolio? Complete this question by entering your answers in the tabs below. Required A Required B Required C What is the proportion y? Note: Round your answer to the nearest whole number. Proportion y %
In this problem we assume that the annual expected rate of return of the market portfolio is 22% and the annual risk-free rate is 2%. The standard deviation of the market portfolio returns is 22%. Assume the market is in equilibrium such that the Capital Asset Pricing Model (CAPM) holds: the market portfolio is efficient. If you have $1,000 to invest, how should you allocate it to achieve an annual expected return of 26%? Invest $260 in the risk-free asset and $740 in the market portfolio Invest $800 in the risk-free asset and $200 in the market portfolio Invest $1,200 in the risk-free asset and sell short $200 in the market portfolio Borrow $260 at the risk-free rate and invest $1,260 in the market portfolio Invest $200 in the risk-free asset and $800 in the market portfolio Borrow $200 at the risk-free rate and invest $1,200 in the market portfolio

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