8. Suppose security X achieves 20% return with half chance and -10% return with half chance. (a) What is the expected return of X? What is the risk (return volatility) of X? (b) Suppose security Y achieves 22% return with 55% chance and -8% return with 45% chance. Suppose you like return and dislike risk (just like all investors). Suppose you can only invest in one of the two securities. Which security (X or Y) would you choose, and why?

8. Suppose security X achieves 20% return with half chance and -10% return with half chance. (a) What is the expected return of X? What is the risk (return volatility) of X? (b) Suppose security Y achieves 22% return with 55% chance and -8% return with 45% chance. Suppose you like return and dislike risk (just like all investors). Suppose you can only invest in one of the two securities. Which security (X or Y) would you choose, and why?

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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F2
Assume that security returns are generated by the single-index model, Ri a BiRM + ei where R₁ is the excess return for security /and Ry is the market's excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security Bi E(Ri} #{@į) A 1.5 61 298 B 1.7 8 15 C 1.9 10 24 a. If oy 26%, calculate the variance of returns of securities A, B, and C. Answer is complete but not entirely correct. Variance Security A 1,521 Security B 1,609 Security C 2,440 b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)
(a) Mr Adani invests in two risky securities with the following details: Security 1: r1=0.16; 01-0.30; Security 2: r2=0.08; 2=0.25 Where r1 is the expected return of security 1 and o1 is the standard deviation of returns of security 1; r2 is the expected return of security 2 and o2is the standard deviation of returns of security 2 The correlation coefficient (p12) between the returns of the two securities is -0.5 (i) Calculate the expected rate of return(r) and risk(o) for the following portfolios: 1.40% security 1 and 60% security 2 II.80% security 1 and 20% security 2 I (ii) Given a risk-free rate of 4%, describe how Mr. Adani can use a combination of a risk-free instrument and a risky portfolio with an expected return of 15% to achieve an expected return of 26%.
Do answer both ASAP.
Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%.The risk-free portfolio that can be formed with the two securities will earn a(n) _____ rate of return. Multiple Choice 8.9%Correct 4%. 9.9% 9.0%Incorrect 8.5%
Assume that the expected rates of return and the beta coefficients of the alternatives supplied by an independent analyst are as follows: Security Estimated rate of returns Beta Nescom 5% 1.5 Market 4 1 Pk_Steel 3.5 0.75 T_Bills 3 0 Nawab 1 -0.6 What is a beta coefficient, and how are betas used in risk analysis? Do the expected returns appear to be related to each alternative’s market risk? Is it possible to choose among the alternatives on the basis of the information developed thus far?
A reduction in the willingness of investors to take on risk would have what effect on the Security Market Line? A.no effect B.rotate the SML counter clockwise around the risk-free rate C.rotate the SML clockwise around the risk-free rate D.shift the SML upward, parallel to its previous location
Consider the following portfolio choice problem. The investor has initial wealth w andutility u(x) = (x^n) /n. There is a safe asset (such as a US government bond) that has netreal return of zero. There is also a risky asset with a random net return that has onlytwo possible returns, R1 with probability 1 − q and R0 with probability q. We assumeR1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w − A isinvested in the safe asset.i) What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving?ii) Find A as a function of w.
D4)
14. Risk free asset, the market, and stock X have the expected returns of 2%, 8%, and 12% respectively. If X and the market has a covariance of 0.1503, what is the risk level of the market (as it is measured by the standard deviation)?
a) First, ignore the fact that r,rf depends on whether you are long or short the risk-free asset. Suppose rrf = 2%. Solve for the tangency portfolio. b) asset. Suppose rrf = 9%. Solve for the tangency portfolio. Again, ignore the fact that rrf depends on whether you are long or short the risk-free Now, for parts c) to f) of the questions, let's take into account that rrf depends on whether c) you are long or short the risk-free asset. Draw out the shape of the efficient frontier. (Hint: think about what (E, o) pairs you can achieve via investing positive amounts in the risk-free asset, and investing negative amounts in the risk-free asset (borrowing). You will use your answers to parts A. and B.). The drawing does not need to be to scale, but needs to illustrate correctly the shape of the efficient frontier. d) deviation of 10%. Solve for the optimal portfolio for the client (that is, the weights wA, WB,Wrf which maximize the client's expected return, conditional on the standard…
(I) The market price of a security at a given time is the highest value any investor puts onthe security. (II) Superior information about a security increases its value by reducing its risk.a) (I) is true, (II) is false.b) (I) is false, (II) is true.c) Both are true.d) Both are false.

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