Anna holds a portfolio comprising the following 3 stocks: X, Y and Z. Amount $'000 2,000 1,000 500 (a) (b) (c) (d) Investment Security X Security Y Security Z Determine the expected return of security X. Calculate the return of Anna's portfolio. Beta 1.3 Calculate the beta of Anna's portfolio. 1.0 0 Expected Return 10% 2% To reduce the systematic risk of the portfolio, Anna is considering 3 securities to add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and Security C has a beta of -0.3. Discuss which security will be most effective in reducing the portfolio's systematic risk? How would portfolio expected return change (higher or lower) if you add this security?

Anna holds a portfolio comprising the following 3 stocks: X, Y and Z. Amount $'000 2,000 1,000 500 (a) (b) (c) (d) Investment Security X Security Y Security Z Determine the expected return of security X. Calculate the return of Anna's portfolio. Beta 1.3 Calculate the beta of Anna's portfolio. 1.0 0 Expected Return 10% 2% To reduce the systematic risk of the portfolio, Anna is considering 3 securities to add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and Security C has a beta of -0.3. Discuss which security will be most effective in reducing the portfolio's systematic risk? How would portfolio expected return change (higher or lower) if you add this security?

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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Suppose Neha is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B с D E There is a Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.50 4.50 6.50 8.50 Place the entirety of her portfolio in bonds 10.50 relationship between the risk of Neha's portfolio and its average annual return. Accept a lower average annual rate of return Sell some of her bonds and use the proceeds to purchase stocks Sell some of her stocks and use the proceeds to purchase bonds Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 Suppose Neha currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated…
-Show the formula step by step-The colleague has given you his forecasts of stocks W and E as follows: State Probability Expected rate ofReturns on Stock W Expected rate ofReturns on Stock E Boom 0.7 0.40 -0.10 Bust 0.3 -0.05 0.30 She would like to invest 80% of his money in stock W and 20% of her money in stock E to construct a portfolio.(B) Calculate the portfolio's expected rate of returns and its standard deviation
You are given the following information for Securities J and K for the coming year: State of Nature Probability Return J 20.00% 14.00% 50.00% 19.00% 30.00% 16.00% 1 2 3 Return K 14.00% 16.00% 25.00% You create a portfolio, with 40 percent of your money invested in Security K, and the rest of your money invested in Security J. Given this information, determine the standard deviation of this portfolio for the coming year. O 0.0301 O 0.0239 O 0.0195 O 0.0263 O 0.0154
Quantitative Problem: You are holding a portfolio with the following investments and betas: Stock Dollar investment Beta A $300,000 1.2 B 200,000 1.6 C 400,000 0.75 D 100,000 -0.35 Total investment $1,000,000 The market's required return is 11% and the risk-free rate is 4%. What is the portfolio's required return? Do not round intermediate calculations. Round your answer to three decimal places.
You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below. Stock A B C Investment $196,000 294,000 490,000 Beta Expected rate of return 1.50 0.55 1.35 Calculate the beta of the portfolio and use the Capital Asset Pricing Model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 18 percent and that the risk-free rate is 9 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%) Beta of the portfolio %
We have the following information on Stocks A and B. The risk-free rate is 5%, and the market risk premium is 7.5%. Assume that the market portfolio is correctly priced. Based on the reward-to-risk ratio, are Stocks A and B overpriced, underpriced, or correctly priced? Stock A Stock B Expected return 1196 16.25% Beta 0.8 1.5
Anna holds a portfolio comprising the following 3 stocks: X, Y and Z. Investment Amount Beta. Expected return Security X $2000. 1.3. Security Y $1000. 1. 10% Security Z. $500. 0. 2% a. Determine the expected return of security X. b. Calculate the return of Anna’s portfolio. c. Calculate the beta of Anna’s portfolio. d. To reduce the systematic risk of the portfolio, Anna is considering 3 securities to add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and Security C has a beta of -0.3. Discuss which security will be most effective in reducing the portfolio’s systematic risk? How would portfolio expected return change (higher or lower) if you add this security?
Quantitative Problem: You are holding a portfolio with the following investments and betas: Stock Dollar investment Beta A $250,000 1.20 B 200,000 1.60 C 400,000 0.80 D 150,000 -0.35 Total investment $1,000,000 The market's required return is 9% and the risk-free rate is 3%. What is the portfolio's required return? Do not round intermediate calculations. Round your answer to three decimal places.
Current Attempt in Progress You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below. Stock A B C Investment $190,000 285,000 475,000 Beta of the portfolio Beta Expected rate of return 1.45 0.60 Calculate the beta of the portfolio and use the Capital Asset Pricing Model (CAPM) to compute the expected rate of return for the portfolio. Assume that the expected rate of return on the market is 17 percent and that the risk-free rate is 6 percent. (Round beta answer to 3 decimal places, e.g. 52.750 and expected rate of return answer to 2 decimal places, e.g. 52.75%.) 1.30 %
Quantitative Problem: You are holding a portfolo with the following investments and betas: Stock Dollar investment Beta A $300,000 1.30 B 200,000 1.70 300,000 0.80 D. 200,000 -0.20 Total investment $1,000,000 The market's required return is 9% and the risk-free rate is 3%. What is the portfolio's required return? Do not round intermediate calculations. Round your answer to three decimal places.
An investor wishes to add new stocks to her portfolio. She has information about twoassets, Stock A and Stock B. Stock A has a beta of 1.25 and an expected return of 20%.Stock B has a beta of 0.9 and expected return of 15%. The risk-free rate is 4.5% and themarket risk premium is 15%.Which of these stocks, if any, would you advise the investor to purchase?
The risk-free rate is 3 percent. Also, the expected return on the market portfolio is 10.5 percent.a. Calculate the expected return of your portfolio. (Hint: The expected return of a portfolio equals the weighted average of the individual stocks" expected returns, where the weights are the percentage invested in each stock.)b. Calculate the portfolio beta.c. Given the preceding information, plot the security market line on paper. Plot the stocks from your portfolio on your graph.d. From your plot in part c, which stocks appear to be your winners, and which ones appear to be your losers?e. Why should you consider your conclusion in part d to be less than certain?

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