Consider the following information in Figure 1 below for a portfolio including security A and security B: Figure 1 State of the economy Probability of state of economy Return on A (%) Return on B (%) Boom 0.2 15 5 Growth 0.2 -5 0 Normal 0.5 10 10 Recession 0.1 5 20 If you want to include one more security C into the above portfolio. (e.g., a new portfolio including securities A, B, and C), what is the new portfolio variance if you invest 40% of C and 60% of the old portfolio including A and B (50% weights for A and B)? Assume the standard deviation of C is 10%, and correlation coefficient between the old portfolio and C is 0.8.

Consider the following information in Figure 1 below for a portfolio including security A and security B: Figure 1 State of the economy Probability of state of economy Return on A (%) Return on B (%) Boom 0.2 15 5 Growth 0.2 -5 0 Normal 0.5 10 10 Recession 0.1 5 20 If you want to include one more security C into the above portfolio. (e.g., a new portfolio including securities A, B, and C), what is the new portfolio variance if you invest 40% of C and 60% of the old portfolio including A and B (50% weights for A and B)? Assume the standard deviation of C is 10%, and correlation coefficient between the old portfolio and C is 0.8.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

See similar textbooks

Similar questions

Consider a portfolio consisting of the below securities with the below characteristics: Security Amount Invested($) Beta Expected Return A 1,5 MIL 1.0 12.0%B 1.0 MIL 1.5 13.5%C 2.0 MIL 0.8 9.0% Required:a) Calculate the portfolio’s Beta. b) Calculate the portfolio’s expected return. c) Discuss the Capital Asset Pricing Model (CAPM) explaining what it is used forand which are its limitations.
portfolio.. - Word **** References Mailings Review View Help RCM Acrobat Foxit Reader PDF Foxit PDF 5. The risk-free rate and the expected market rate of return are 0.04 and 0.14, respectively. According to the capital asset pricing model (CAPM), the expected rate of return on security X with a beta of 1.25 is equal to: a. 0.004 b. 0.165 C. 0.121 d. 0.132
Consider the following information for four portfolios, the market, and the risk-free rate (RFR): Portfolio Return Beta SD A1 0.15 1.25 0.182 A2 0.1 0.9 0.223 A3 0.12 1.1 0.138 A4 0.08 0.8 0.125 Market 0.11 1 0.2 RFR 0.03 0 0 Refer to Exhibit 18.6. Calculate the Jensen alpha Measure for each portfolio. a. A1 = 0.014, A2 = -0.002, A3 = 0.002, A4 = -0.02 b. A1 = 0.002, A2 = -0.02, A3 = 0.002, A4 = -0.014 c. A1 = 0.02, A2 = -0.002, A3 = 0.002, A4 = -0.014 d. A1 = 0.03, A2 = -0.002, A3 = 0.02, A4 = -0.14 e. A1 = 0.02, A2 = -0.002, A3 = 0.02, A4 = -0.14
Consider the following information: The possible rate of return for a portfolio for an investment is shown below.Probability Possible rate of return 0.25 0.09 0.25 0.11 0.25 0.13 0.25 0.16What is the expected rate of return for the investment?
Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Рayolf Price Security State 1 State 2 PA=2 A 4 2 PB-3 B a. Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure socurities by arbitrage.
The following data are available to you as portfolio manager: Security Estimated return (%) Beta A 40 3.0 B 35 2.5 C 30 1.0 D 17.5 1.8 E 20.0 1.5 Market Index 25 2.0 Government Security 17 0 In terms of the security market line, which of the securities listed above are underpriced? Assuming that a portfolio is constructed using equal proportions of the five securities listed above, calculate the expected return and risk of such a portfolio
The optimal proportion of the risky asset in the complete portfolio is given by the equation below y*= E(Rp− Rf) A0² For each of the variables on the right side of the equation, discuss the impact of the variable's effect on y* and why the nature of the relationship makes sense intuitively. Assume the investor is risk averse
Suppose you observe the following situation:Security Beta Expected ReturnDiamond Co 1.3 0.2Spade Co 0.8 0.14 (a) According to the above information, could we figure out the market return and risk-free rate? Explain your answer. (b) Discuss the possibility of including zero beta or negative beta assets in your portfolio. Explain the pros and cons of including these types of assets.
Assume the APT equation for portfolios A and B with the following system of equations: E[rA] = λ0 + (λ1)3 + (λ2)0.2 = 11.0 E[rB] = λ0 + (λ1)2 + (λ2)1 = 13.0 Assume the following: . The risk free rate is λ0 = Rf = 5 . The expected return on the market portfolio is RM = 10 . Expected returns are consistent with the CAPM. . (hint: note that λ1 = E[RA] − Rf and λ2 = E[RB] − Rf ). Answer the following: (a) What are λ1 and λ2? (b) What is the CAPM β associated with the pure portfolio associated with factor 1? (c) What is the CAPM β associated with the pure portfolio associated with factor 2?
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: Portfolio Y Z Market Risk-free Rp 13.5% бр 35.00% 12.5 30.00 7.1 20.00 10.6 4.4 25.00 0 Вр 1.55 1.20 0.80 1.00 0 Assume that the correlation of returns on Portfolio Y to returns on the market is 0.70. 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. × Answer is complete but not entirely correct. R-squared 0.9785
As diversification increases, the firm-specific risk of a portfolio approaches A. 1. B. infinity. C. 0. D. (n – 1) × n.
Consider the following performance data for a portfolio manager: Benchmark Portfolio Index Portfolio Weight Weight Return Return Stocks 0.65 0.7 0.11 0.12 Bonds 0.3 0.25 0.07 0.08 Cash 0.05 0.05 0.03 0.025 a.Calculate the percentage return that can be attributed to the asset allocation decision. b.Calculate the percentage return that can be attributed to the security selection decision.