ROLYou currently have 50% of your wealth invested in a risk-free asset and 50% in thefour assets belowAsset i1234Expected Return onAsset i (%)7.612.415.618.80.20.821.6Bi3Percentage investedin Asset i (%)10101020If you want an expected rate of return of 12%, you can obtain it by selling some of your holdingsof the risk-free asset and using the proceeds to buy the equally weighted market portfolio. Ifthis is the way you decide to revise your portfolio, what will the rest of weights in your portfoliobe? If you hold only the risk-free asset and the market portfolio, what set of weights would giveyou an expected return of 12%?

The solution requires the risk free rate which is not given. Instead, betas are given so we can use…

four assets below Asset i 1 2 3 4 Expected Return on Asset i (%) 7.6 12.4 15.6 18.8 0.2 0.8 Bi 21.3 1.6 Percentage investec in Asset i (%) 10 10 10 20 If you want an expected rate of return of 12%, you can obtain it by selling some of your holding of the risk-free asset and using the proceeds to buy the equally weighted market portfolio. this is the way you decide to revise your portfolio, what will the rest of weights in your portfol be? If you hold only the risk-free asset and the market portfolio, what set of weights would giv you an expected return of 12%?

four assets below Asset i 1 2 3 4 Expected Return on Asset i (%) 7.6 12.4 15.6 18.8 0.2 0.8 Bi 21.3 1.6 Percentage investec in Asset i (%) 10 10 10 20 If you want an expected rate of return of 12%, you can obtain it by selling some of your holding of the risk-free asset and using the proceeds to buy the equally weighted market portfolio. this is the way you decide to revise your portfolio, what will the rest of weights in your portfol be? If you hold only the risk-free asset and the market portfolio, what set of weights would giv you an expected return of 12%?

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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Question

ROL
You currently have 50% of your wealth invested in a risk-free asset and 50% in the
four assets below
Asset i
1
2
3
4
Expected Return on
Asset i (%)
7.6
12.4
15.6
18.8
0.2
0.8
2
1.6
Bi
3
Percentage invested
in Asset i (%)
10
10
10
20
If you want an expected rate of return of 12%, you can obtain it by selling some of your holdings
of the risk-free asset and using the proceeds to buy the equally weighted market portfolio. If
this is the way you decide to revise your portfolio, what will the rest of weights in your portfolio
be? If you hold only the risk-free asset and the market portfolio, what set of weights would give
you an expected return of 12%?

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If the yield curve is upward sloping: Hint: When there is an increase in the demand for an asset, the price of the asset goes up. You expect returns from investing in such ("higher-priced") asset to be lower in the future. Conversely, when there is a decrease in the demand for an asset, the price of the asset goes down. You expect returns from investing in such ("lower-priced") asset to be higher in the future. O investors expect the short-term interest rates to fall in the future. investors often shift their investment holdings away from long-term securities. investors often short sell short-term securities. investors often shift their investment holdings away from short-term securities.
Wolff Enterprises must consider one investment project using the capital asset pricing model (CAPM). Relevant information is presented in the following table. Item Rate of return Beta, b Risk-free asset 9% 0.00 Market portfolio 14% 1.00 Project 1.74 a. Calculate the required rate of return for the project, given its level of nondiversifiable risk. b. Calculate the risk premium for the project, given its level of nondiverisifiable risk.
Consider the case of two financial assets and three market conditions (states). The tablebelow gives the respective probability for each market condition and the return of each assetin each one of them. Market Conditions State Recession Normal Expansion Probability of state 30% 40% 30% Return of asset A -30% 20% 55% Return of asset B -10% 70% 0% Consider the portfolio with 50% investment in each of the two assets above. Calculatethe expected return and the standard deviation of the portfolio.
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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2. Assuming the following: Average Return (Risky Portfolio) 3.86% Standard Dev (Risky Portfolio) 10.56% Average Risk Free Rate 2.18% Return on Risk Free Asset Avg 4.15% Using the formula: E(rc)=rf + y* (E(rp) - rf) Solve for: 1. % of Risky Assets (y): 2. % of Risk Free Assets (1-y): Note: You wish to generate a 7% return for your complete portfolio E(rc)
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You want to create a portfolio equally as risky as the market, and you have $1,200,000 to invest. Consider the following information: Asset Stock A Stock B Stock C Risk-free asset What is the investment in Stock C? Investment Investment $300,000 $ 240,000 Investment Beta 0.70 1.10 1.50 What is the investment in risk-free asset?

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