Compute the expected rate of return of Miss Dimaano considering her security for her work as a freelance investment banker based on the following figures: Risk free rate = 4%; Expected return of the market = 12%; Systematic risk b of the security = 1.3
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- 1) a. You approach your broker to borrow money against securities held in your portfolio. Eventhough the loan will be secured by the securities in your portfolio, the broker's rate for lending tocustomers is 5 percent. Assuming a risk-free rate of 4 percent and an expected market return of 11percent with a standard deviation of 15 percent, draw the capital market line related to yourinvestment opportunities. b. Estimate your expected return and risk if you invest 20 percent of your portfolio in the risk-freeasset. What if you decide to borrow 20 percent of your initial wealth and invest the money in themarket?Consider the following information about a risky portfolio that youmanage, and a risk-free asset: E(rP ) = 11%, σP = 15%, rf = 5%.a) Your client wants to invest a proportion of her total investment budget in your riskyfund to provide an expected rate of return on her overall or complete portfolio equal to8%. What proportion should she invest in the risky portfolio, P, and what proportionin the risk-free asset? b) What will be the standard deviation of the rate of return on her portfolio? c) Another client wants the highest return possible subject to the constraint that you limithis standard deviation to be no more than 12%. Which client is more risk averse?Use the data below to answer the following question. If you have a risk-aversion factor of 2.5 and the risk-free rate is 2%, you would invest _______% of your money in the risky portfolio. Year Return 2014 -15% 2015 -5% 2016 30% 2017 -10% 2018 35%
- Suppose you are considering investing your entire portfolio in three assets A, B and C. You expect that after you invest, four possible mutually exclusive scenarios will occur, with associated returns (in %) for each of the three assets as listed below. The probability of each scenario is given below (Attached image). Find the expected returns and standard deviations of Asset A, B & C. (HINT: the expected return is given by the probability-weighted sum of returns in each scenario. The expected standard deviation is given by the square root of the probability-weighted sum of squared deviations from the expected return.) Is there any reason to invest in Asset A given its low expected return and high standard deviation?Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 16%. a. Calculate the market risk premium. b. Given the previous data, calculate the required return on asset A having a beta of 0.4 and asset B having a beta of 1.8.Calculate the required rate of return for an asset that has a beta of 1.01, given a risk-free rate of %3.4 and a market return of %9.1 . b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to %11.6, what is the required rate of return for the same asset? a. The required rate of return for the asset is enter your response here%. (Round to two decimal places.) Part 2 b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to 11.6%, the required rate of return for the same asset is enter your response here%. (Round to two decimal places.)
- Use the basic equation for the CAPM to rework each of the following problems for above case. Case A) Find the required return for an asset with a beta of 0.9 when the risk-free rate and market return are 8% and 12% respectively. Case B) Find the risk-free rate for a firm with a required return of 15% and a beta of 1.25 when the market return is 14%. Case C) Find the market return for an asset with a required return of 16% and a beta of 1.1 when the risk-free rate is 9%. Case D) Find the beta for an asset with a required return of 15% when the risk-free rate and market return are 10% and 12.5% respectively.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: James owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Electronics (HWE). Three-quarters of James’s portfolio value consists of BLM’s shares, and the balance consists of HWE’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 Blue Llama Mining Hungry Whale Electronics Strong 0.25 27.5% 38.5% Normal 0.45 16.5% 22% Weak 0.30 -22%…If the risk-free rate is 3.80 percent and the risk premium is 2.8 percent, what is the required return? (Round your answer to 1 decimal place.) Required return
- Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: What are her expected returns and the risk from her investment i 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. What is the expected return of investing equally in all three assets M, N, and O? % (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) States Boom Probability 27% Asset M Return 13% 10% Normal 48% Recession 25% 1% Asset N Return 23% 15% 3% Asset O Return 1% 10% 13% XBenefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: En 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 ti assets M, N, and O. b. Could Sally reduce her total risk even more by u tandard deviation - X i Data Table a. What is the expected return of investing equally % (Round to two decimal places.) (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability Asset M Returm Asset N Retum Asset O Retum 21% 12% -2% 25% 53% Boom 10% Normal 7% 7% Recession 22% 2% 1% 10% Print DoneRemember, 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: Tyler owns a two-stock portfolio that invests in Celestial Crane Cosmetics Company (CCC) and Lumbering Ox Truckmakers (LOT). Three-quarters of Tyler’s portfolio value consists of CCC’s shares, and the balance consists of LOT’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 Celestial Crane Cosmetics Lumbering Ox Truckmakers Strong 0.20 35% 49% Normal 0.35 21% 28%…
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