Consider the Excel template for the two-asset efficient frontier as provided in the announcement for the quiz. Set the mean return for the SP500 to be 10% with 20 % standard deviation (green box) Set the mean return for the TBond to be 5% with 10% standard deviation (green box) Set the correlation between the SP500 and the TBond to be 10% (green box) Set the target portfolio return to be 10% in expectation (yellow box) Find the minimum standard deviation using Excel's solver (blue box). What is it?

Consider the Excel template for the two-asset efficient frontier as provided in the announcement for the quiz. Set the mean return for the SP500 to be 10% with 20 % standard deviation (green box) Set the mean return for the TBond to be 5% with 10% standard deviation (green box) Set the correlation between the SP500 and the TBond to be 10% (green box) Set the target portfolio return to be 10% in expectation (yellow box) Find the minimum standard deviation using Excel's solver (blue box). What is it?

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 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?
4. Suppose there are three uncorrelated assets. Each has a variance of 1.0 and expected rates of return are 1, 2, and 3, respectively. For this example, short sales are allowed. Do the following: a. Find the minimum variance portfolio for the following desired expected portfolio rates of return: 1.0, 1.5, 2.0, 2.5, and 3.0. b. Sketch these on the return versus risk plot (you will need to use the standard deviation of the portfolio, which clearly equals sqrt(w1^2+w2^2+w3^3), where wi are the weights). c. Suppose we have a risk-free asset with a return of 2%. Modify your plot for b.
Asset W has an expected return of 13.15 percent and a beta of 1.28. If the risk free rate is 4.53 percent, complete the following table for portfollos of Asset W and a risk-free asset. Note: Leave no cells blank- be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your portfolio expected return answers as a percent rounded to 2 decimal places, e.g., 32.16. Enter your portfolio beto answers rounded to 3 decimal places, e.g. 32.161. Percentage of Portfolio Expected Portfolio in Asset W Return 0% 25 50 25 100 125 150 453 % 669% 184% 11.00% 13.15 % 15.31% 17.46% Portfolio Beta 0250 0640 1024 1.200 6057 006
Consider two portfolios, Portfolio A and Portfolio B, with the following performance metrics: - Portfolio A has a Sharpe Ratio of 0.8, a Treynor Ratio of 1.2, and a Jensen's Alpha of 0.5. - Portfolio B has a Sharpe Ratio of 1.2, a Treynor Ratio of 0.9, and a Jensen's Alpha of -0.2. Which of the following statements is correct regarding the performance of these portfolios? Portfolio A has a higher risk-adjusted return when the risk is measured by the beta. Portfolio B outperforms the risk-adjusted return suggested by CAPM. Portfolio A and B have similar risk-adjusted returns, but Portfolio B exhibits negative abnormal returns. Portfolio B has a higher risk-adjusted return when the risk is measured by the standard deviation. Portfolio A outperforms Portfolio B in terms of both risk-adjusted return and abnormal returns suggested by CAPM.
The Ajax Company uses a portfolio approach to manage their research and development (R&D) projects. Ajax wants to keep a mix of projects to balance the expected return and risk profiles of their R&D activities. Consider a situation in which Ajax has six R&D projects as characterized in the table. Each project is given an expected rate of return and a risk assessment, which is a value between 1 and 10, where 1 is the least risky and 10 is the most risky. Ajax would like to visualize their current R&D projects to keep track of the overall risk and return of their R&D portfolio. Project Expected Rateof Return (%) Risk Estimate Capital Invested(Millions $) 1 12.6 6.8 6.4 2 14.8 6.2 45.8 3 9.2 4.2 9.2 4 6.1 6.2 17.2 5 21.4 8.2 34.2 6 7.5 3.2 14.8 The efficient frontier of R&D projects represents the set of projects that have the highest expected rate of return for a given level of risk. In other words, any project that has a smaller expected rate…
Suppose that the return on the risk-free asset is rRFrRF = 15%, the return on the market portfolio is r̂Mr̂M = 20%, the market risk is σMσM = 10%, and the portfolio risk is σpσp = 15%. Then the expected rate of return on an efficient portfolio equals . Generally, a less risky portfolio would havea lower rate of return.
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: 8p 1.70 1.30 0.85 1.00 Portfolio X Y Z Market Risk-free Rp 11.5% 10.5 7.2 10.9 4.6 R-squared op 38.00% 33.00 23.00 28.00 0 Assume that the correlation of returns on Portfolio Y to returns on the market is 0.76. What percentage of Portfolio Y's return is driven by the market? Note: Enter your answer as a decimal not a percentage. Round your answer to 4 decimal places.
10) Given an optimal risky portfolio with expected return of 15%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL? A) 0.64 B) 0.27 C) 0.08 D) 0.38 E) 0.36 Provide explanation for the correct answer.
In order to create an efficient set of portfolios thru optimization using concepts from Markowitz portfolio theory, you would need to forecast only 2 variables including expected return and standard deviation or variance for the asset classes or securities in focus. True or false
A person is interested in constructing a portfolio. Two stocks are being considered. Letx = percent return for an investment in stock 1, and y = percent return for an investment instock 2. The expected return and variance for stock 1 are e(x) = 8.45% and Var(x) = 25.The expected return and variance for stock 2 are e(y) = 3.20% and Var(y) = 1. Thecovariance between the returns is sxy = −3.a. what is the standard deviation for an investment in stock 1 and for an investment instock 2? Using the standard deviation as a measure of risk, which of these stocks isthe riskier investment?
Chose one of the options below The Mean-Variance Optimization (MVO) model finds the portfolio weights with the smallest variance for a given level of expected return, given the individual assets' expected returns, variances and correlations. The Black-Litterman model is the mean-variance optimization model run backwards, that is, the MVO model solved for variables other than the weights. The Black-Litterman model solves for the A. asset pairwise correlations B. asset standard deviations C. portfolio weights D. asset expected returns
1. Consider an environment of 40 individual risky securities and one risk free asset. One investoris selecting between the Markowitz mean-variance frontier framework and the index model inthe portfolio analysis. (a) How many parameters are used as the input to construct the mean-variance frontier? (b) How many inputs are used for the index model?

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