Consider the following information relating to the following three assets: Asset C, the 10 year government bond rate (which can be used as a proxy for the risk-free rate of return) and the ASX 200 index (which can be used as a proxy for the market portfolio). Asset C: Standard deviation of returns (p.a.) 0.35, Expected return (p.a.)? 10-year gov't bond: Standard deviation of returns (p.a.) 0, Expected return (p.a.) 0.03 ASX200 Index: Standard deviation of returns (p.a.) 0.15, Expected return (p.a.) 0.10 Correlation between Asset C and the 10-year government bond: 0 Correlation between Asset C and the ASX200 Index: 0.65 Correlation between the ASX200 Index and the 10-year government bond: 0 (a) What is the beta of Asset C? (to 2 decimal places) (b) According to the CAPM what is the expected return of Asset C? (express as a percentage figure to 2 decimal places e.g. 50.04%) (c) According to the CAPM what is the beta and expected return of a portfolio consisting of a 50% investment in Asset C and a 50% investment in a diversified portfolio that replicates the ASX200? (express your answers as in (a) and (b))

Consider the following information relating to the following three assets: Asset C, the 10 year government bond rate (which can be used as a proxy for the risk-free rate of return) and the ASX 200 index (which can be used as a proxy for the market portfolio). Asset C: Standard deviation of returns (p.a.) 0.35, Expected return (p.a.)? 10-year gov't bond: Standard deviation of returns (p.a.) 0, Expected return (p.a.) 0.03 ASX200 Index: Standard deviation of returns (p.a.) 0.15, Expected return (p.a.) 0.10 Correlation between Asset C and the 10-year government bond: 0 Correlation between Asset C and the ASX200 Index: 0.65 Correlation between the ASX200 Index and the 10-year government bond: 0 (a) What is the beta of Asset C? (to 2 decimal places) (b) According to the CAPM what is the expected return of Asset C? (express as a percentage figure to 2 decimal places e.g. 50.04%) (c) According to the CAPM what is the beta and expected return of a portfolio consisting of a 50% investment in Asset C and a 50% investment in a diversified portfolio that replicates the ASX200? (express your answers as in (a) and (b))

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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Currently, 3-year Treasury securities yield8.7%,7-year Treasury securities yield8.4%, and 10 -year Treasury securities yield8.2%. If the expectations theory is correct, what does the market expect will be the yield on 3-year Treasury securities seven years from today? 8.13%8.33%7.73%7.53%7.93%
Consider the following information on different asset classes from 1926 through 2020. Arithmetic Mean 12.2% 16.2 6.5 6.1 5.3 3.3 2.9 Series Large-company stocks Small-company stocks Long-term corporate bonds Long-term government bonds Intermediate-term government bonds U.S. Treasury bills Inflation a. What is the real return on long-term government bonds? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the real return on long-term corporate bonds? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Real return b. Real return % %
Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Assume for a certain time period, long-term corporate bonds had an average return of 6.5 percent and a standard deviation of 8.5 percent. For the same period, T-bills had an average return of 3.3 percent and a standard deviation of 3.1 percent. Use the NORMDIST function in Excel to answer the following questions: a. What is the probability that in any given year, the return on long-term corporate bonds will be greater than 10 percent? Less than 0 percent? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the probability that in any given year, the return on T-bills will be greater than 10 percent? Less than 0 percent? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. c. In 1979, the return on long-term corporate bonds was -4.18 percent. How…
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Suppose the returns on long-term government bonds are normally distributed. Assume long-term government bonds have a mean return of 6.1 percent and a standard deviation of 9.8 percent. What is the approximate probability that your return on these bonds will be less than −3.7 percent in a given year? Use the NORMDIST function in Excel® to answer this question. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What range of returns would you expect to see 95 percent of the time? Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. What range would you expect to see 99 percent of the time? Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter…
Duration and price sensitivity a) Calculate the duration and modified duration of a bond with a face of $1,000, a 6% coupon rate, and a 5% YTM with 1 payment per year and a maturity of 10 years, using the Excel DURATION and MDURATION formulas. b) Calculate the following: 1. What are the approximate percentage and dollar changes in price for a 1% change in interest rates using the duration approximation formula? 2. What are the actual percentage and dollar changes in price if interest rates increase by 1%?
The value of any financial asset is the present ✓ value of the cash flows the asset is expected to produce. For a bond with fixed annual coupons, its value is equal to the present value of all its annual interest payments and its maturity value as shown in the equation below: Bond's value = VB: Int. Int. (1+ra)² (1+ra)² N + ·+...+ Int. M + (1+ra)* (1+ra) Int. M (1+ra) (1+ra)N + We could use the valuation equation shown above to solve for a bond's value; however, it is more efficient to use a financial calculator. Simply enter N as years to maturity, I/YR as the going annual interest rate, PMT as the annual coupon payment (calculated as the annual coupon interest rate times the face value of the bond), and FV as the stated maturity value. Once those inputs are entered in your financial calculator, you can solve for PV, the value of the bond. Remember that the signs for PMT and FV should be the same, so PV will have an opposite sign. Typically, you would enter PMT and FV as positive…
The rate of return on CBO government bonds during the past year is 6.0%. The inflation rate during the past year is 2.8%. The real risk free rate of return is Select one: O a. None of these O b. 1.0311 O c. 25% O d. 3.11% e. 1.25
am. 11.
a) Assume the yield to maturity on a 10 year Australian government bond is 2% and the market risk premium is 5%. what is the expected rate of return on a share with market average systematic risk? provide workings and explain beta value used it is b) explain what happens to the risk of a portfolio as the number of assets in the portfolio is increased?
Borrower Inc. is currently estimating the value of its bonded indebtedness with the following information: Real risk-free rate is currently estimated at 4.25% The expected inflation premium is at 1.75% Considering the current creditworthiness of Borrower Inc., it's credit spread is estimated at: 2.0% for 3-year maturity instruments 3.0% for 4-year maturity instruments 4.0% for 5-year maturity instruments Borrower Inc. have the following issued bonded indebtedness: Bond A carries a 5-year tenor with a face value of Php500,000 issued 2 years ago carrying a coupon of 8.0% per annum. Bond B carries a 5-year tenor with a face value of Php600,000 issued a year ago carrying a coupon of 10.0% per annum. Bond C carries a 8-year tenor with a face value of Php400,000 issued 3 years ago carrying a coupon of 11.5% per annum. 1. What is the value of Bond A? Clue - correct answer should have a string of number "00" appearing in sequence in any unit until two decimal points. 2. What is the…

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