Asset Stock A Stock B Stock C Stock D Expected Return (%) 25 22 21 16 Beta 1.6 2.2 1.4 1.5 Asset T-bills Passive equity portfolio Residual Standard Deviation (%) 50 58 55 43 Macro Forecasts Expected Return (%) 12 18 Standar Deviation ↳ 0 30
Asset Stock A Stock B Stock C Stock D Expected Return (%) 25 22 21 16 Beta 1.6 2.2 1.4 1.5 Asset T-bills Passive equity portfolio Residual Standard Deviation (%) 50 58 55 43 Macro Forecasts Expected Return (%) 12 18 Standar Deviation ↳ 0 30
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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Concept explainers
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.
Question
Transcribed Image Text:A portfolio manager summarizes the input from the macro and micro forecasters in the following table:
Micro Forecasts
Asset
Stock A
Stock B
Stock C
Stock D
Expected
Return (%) Beta Deviation (%)
1.6
25
22
21
16
Asset
T-bills
Passive equity portfolio
Residual
Standard)
2.2
1.4
1.5
Cost of restriction
50
58
55
43
Macro Forecasts
Expected Return (%)
12
18
Standard
Deviation (%)
0
30
Calculate the following for a portfolio manager who is not allowed to short sell securities. If allowed to short sell securities, the
manager's Sharpe ratio is 0.2476.
a. What is the cost of the restriction in terms of Sharpe's measure? (Do not round intermediate calculations. Enter your answer as
decimals rounded to 4 places.)
Transcribed Image Text:a. What is the cost of the restriction in terms of Sharpe's measure? (Do not round intermediate calculations. Enter your answer as
decimals rounded to 4 places.)
Cost of restriction
b. What is the utility loss to the Investor (A=3.7) given his new complete portfolio? (Do not round intermediate calculations. Round
your answers to 2 decimal places.)
Cases
Unconstrained
Constrained
Passive
Utility Levels
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