Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: a. What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hint. Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. . Could Sally reduce her total risk even more by using assets M and N only, assets M and O only, or assets N and O only? Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair. a. What is the expected return of investir 8.40% (Round to two decimal places.) What is the expected return of investing i % (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability 35% Asset M Return 10% Boom Normal 54% 7% Recession 11% -2% Asset N Return 21% 12% 1% Asset O Return - 2% 7% 10% -

Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: a. What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hint. Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. . Could Sally reduce her total risk even more by using assets M and N only, assets M and O only, or assets N and O only? Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair. a. What is the expected return of investir 8.40% (Round to two decimal places.) What is the expected return of investing i % (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability 35% Asset M Return 10% Boom Normal 54% 7% Recession 11% -2% Asset N Return 21% 12% 1% Asset O Return - 2% 7% 10% -

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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No risk, no reward. Most people intuitively understand that they have to bear some risk to achieve an acceptable return on their investment portfolios. But how much risk is right for you? If your investments turn sour, you may put at jeopardy your ability to retire, to pay for your kid's college education, or to weather an unexpected need for cash. These worst-case scenarios focus our attention on how to manage our exposure to uncertainty. Assessing and quantifying-risk aversion is, to put it mildly, difficult. It requires confronting at least these two big questions. First, how much investment risk can you afford to take? If you have steady high-paying job, for example, you have greater ability to withstand investment losses. Conversely, if you are close to retirement, you have less ability to adjust your lifestyle in response to bad investment outcomes. Second, you need to think about your personality and decide how much risk you can tolerate. At what point will you be unable to…
What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumed
To obtain the maximum reduction in risk, an investor should combine assets that * A.are negatively correlated. B.have a correlation coefficient of negative one. C.are uncorrelated. Option 5 D.have a correlation coefficient of positive one.
1. Which of the following statements are true?a. The value of any investment is based on the cash flows it is expected to generate in the future.b. Investors are not generally risk averse.c. Uncertain cash flows are preferred to certain cash flows.d. All of the above are true.e. None of the above are true. 2. A basic knowledge of finance will help you with your personal investments by helping you understanda. how to accurately predict changes in the short-term interest rates.b. how to determine the optimal dividend policy for each firm.c. how to determine which technology is most likely to be accepted by consumers.d. how to review companies and industries to determine their prospects for future growth and therisk inherent in those companies and industries.e. how to predict the growth in sales for the firm. 3. Which of the following events would make it more likely that a company would choose to call itsoutstanding callable bonds?a.A reduction in market interest rates.b.The company's…
Which of the following statements is correct? a. Since investors prefer more return and less risk, one will never hold a dominated asset in the risk-return sense. In other words, if asset A has a higher expected return and lower standard-deviation than asset B, then investors would only hold asset A in their optimal portfolio. b. The IRR method correctly ranks mutually exclusive projects. c. When an investment project is evaluated today, the spending that occurred in the last year has to be included in the NPV analysis. d. The payback period criterion properly considers the time value of money. e. When there are two mutually exclusive projects, the project with the highest NPV should be chosen.
In the context of the different categories of investors, match each sentence to the correct category of investor. * Conservative Moderate conservative Moderate Moderate aggressive Aggressive This investor is looking to invest for the long-term with a specific goal in mind (for example, college savings, retirement, etc.). Investor who does not want to lose any capital and counts on the investment revenues to pay for day to day living expenses. This investor is willing to take on more risk to realize higher returns, being able to accept higher downside risk than the market, but expects to be substantially compensated when markets go up. Similar to Conservative, but this investor wants to participate a little more in market changes although wants maximum protection. This investor is willing to accept large fluctuations in portfolio returns to produce returns substantially above the market in the long-term, usually having an extremely long-term horizon so that she/he can…
If Justine Bieber have P1,000,000 and he needs to create an investment portfolio, what are the assets that he might to considerate or intend to invest upon? Have an estimate proportion. Why Justine Bieber choosing those assets? Explain briefly and intelligently.
In a few sentences, answer the following question as completely as you can. According to the CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain the role of each one in determining expected return.
2. Statistical measures of stand-alone risk Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances. To compute an asset’s expected return under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: Ethan owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of Ethan’s portfolio value consists of FF’s shares, and the balance consists of PP’s shares. Each stock’s expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Probability of Occurrence Falcon Freight Pheasant Pharmaceuticals Strong 0.25 30% 42%…
When comparing NPV and IRR, which is incorrect? With NPV, the discount rate can be adjusted to take into account increased risk and the uncertainty of cash flows With IRR, cash flows can be adjusted to account for risk NPV can be used to compare investments of various size or magnitude Both NPV and IRR can be used for screening decisions
Technically, the required return of an investment can be determined by determining the investments risk profile. However, many intangible factors influence an investor’s decision to invest. Discuss the intangible factors that may come into play in the investment decision process.

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