Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $195,000, with equalprobabilities of 0.5. The alternative riskless investment in T-bills pays 4%.Required:a. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollaramount.)Value of the Portfoliob. Suppose the portfolio can be purchased for the amount you found in (a). What will the expected rate of return on the portfolio be?(Do not round intermediate calculations. Round your answer to the nearest whole percent.)Rate of return%c. Now suppose you require a risk premium of 11%. What is the price you will be willing to pay now? (Round your answer to thenearest dollar amount.)Value of the portfolio

The expected return is the estimation of profit or loss that an investor determines from his…

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $195,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%. Required: a. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.) Value of the Portfolio b. Suppose the portfollo can be purchased for the amount you found in (a). What will the expected rate of return on the portfolio be? (Do not round intermediate calculations. Round your answer to the nearest whole percent.) Rate of return % c. Now suppose you require a risk premium of 11%. What is the price you will be willing to pay now? (Round your answer to the nearest dollar amount.) Value of the portfolio

Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $70,000 or $195,000, with equal probabilities of 0.5. The alternative riskless investment in T-bills pays 4%. Required: a. If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? (Round your answer to the nearest dollar amount.) Value of the Portfolio b. Suppose the portfollo can be purchased for the amount you found in (a). What will the expected rate of return on the portfolio be? (Do not round intermediate calculations. Round your answer to the nearest whole percent.) Rate of return % c. Now suppose you require a risk premium of 11%. What is the price you will be willing to pay now? (Round your answer to the nearest dollar amount.) Value of the portfolio

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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The Treasury bill rate is 6%, and the expected return on the market portfolio is 10%. According to the capital asset pricing model: a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.4? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. If an investment with a beta of 0.8 offers an expected return of 9.0%, does it have a positive or negative NPV? d. If the market expects a return of 11.0% from stock X, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market risk premium |% a. b. Return on investment % с. NPV d. Beta
Suppose now that your portfolio must yield an expected return of 13% and be efficient, that is, on the best feasible CAL. What is the proportion invested in the T-bill fund?
Consider a borrow-and-invest strategy in which you use $1 million of your own money and borrow another $1 million (at the t-bill rate) to invest $2 million in a market index fund. If the risk free interest rate is 5.52 percent and the expected rate of return on the market index fund is 12.68 percent, what is the risk premium on this borrow-and-invest strategy?
State the return rate (in %) for your optimal portfolio.
Suppose the market risk premium is 6.8% and the risk-free interest rate is 4.5%. Calculate the cost of capital of investing in a project with a beta of 1.4.
A project under consideration has an internal rate of return of 18% and a beta of 0.5. The risk-free rate is 6%, and the expected rate of return on the market portfolio is 18%. a. What is the required rate of return on the project? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Should the project be accepted? c. What is the required rate of return on the project if its beta is 1.50? (Do not round intermediate calculations. Enter your answer as a whole percent.) d. If project's beta is 1.50, should the project be accepted?
In an economy where the Capital Asset Pricing Model(CAPM) holds, the riskfree interest rate is 1%. The expected return of the market portfolio is 16% and its standard deviation is 20%. Suppose there is a portfolio with expected return of 25%. What should be its standard deviation? Select one: a.31.25% b.30% c.32% d. Insufficient information to determine the answer.
You are considering a risky investment that you expect will either be worth 115,000 in 1 year, or 65,000, with probabilities of 0.65 and 0.35 for each outcome, respectively. You could invest in riskless T-bills at 0.058. If you invest in this risky investment, you would expect to earn a risk premium of 0.091 Given this information, what would you be willing to pay for this investment? 84,856 78,059 79,001 73,655 82,693
Consider a risky portfolio. The end-of-year cash flow derived from the portfolio will be either $150,000 or $290,000 with equal probabilities of 0.5. The alternative risk-free investment in T-bills pays 3% per year. Required: a. If you require a risk premium of 7%, how much will you be willing to pay for the portfolio? b. Suppose that the portfolio can be purchased for the amount you found in (a). What will be the expected rate of return on the portfolio? c. Now suppose that you require a risk premium of 12%. What price are you willing to pay? Complete this question by entering your answers in the tabs below. Required A Required B Required C If you require a risk premium of 8%, how much will you be willing to pay for the portfolio? Note: Do not round your intermediate calculations. Round your answer to the nearest whole dollar amount. Price Required A Required B >
You are evaluating various investment opportunities currently available and you have the fol-lowing information about five different well-diversified portfolios of risky assets. Interest raterf = 3% a) Calculate the Sharpe ratio for each portfolio. (b) Explain which of these five portfolios is most likely to be the optimal risky portfolio. (c) Suppose you are willing to invest with an expected return of 6%. What would be theinvestment proportions in the riskless asset and the optimal risky portfolio? What is thestandard deviation of the return for this investment?
The expected return for the investment is ??? The standard deviation is ??? While the expected return for the risk-free assets, Treasury Bills, is ??? The standard deviation is ???
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. A B C Probabilities return 0.05 0.50% -3.60% 3.60% 0.35 0.60% 2.75% 0.15% 0.45 3.66% 1.45% 0.45% 0.15 -4.80% -0.60% 6.30% 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?

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