Over the past several weeks you have assembled a small stock portfolio via the purchase ofsmall amounts of different company stocks. You know that the point of a portfolio is toreduce your overall exposure to systematic risk, but aren't sure exactly what the risk of yournew portfolio is. You have purchased the following: $9,000 of Ford Stock, $4,000 of JohnDeer Stock, and $2,000 of Health Care of America (HCA) Stock. You have estimated the betasof these stocks to be the following: a ẞ of 4.29 for Ford, a ẞ of 2.50 for John Deere, and a ẞof 2.2 for HCA. What is the beta of your portfolio? (Round to 2 decimals)Answer:

Step 1: Given Value for Calculation Value of Ford Stock = vf = $9000Value of John Deer Stock = vj =…

Answered: Over the past several weeks you have…

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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Four analysts cover the stock of Fluorine Chemical. One forecasts a 5% return for the coming year. The second expects the return to be −6%. The third predicts a return of 8%. The fourth expects a 2% return in the coming year. You are relatively confident that the return will be positive but not large, so you arbitrarily assign probabilities of being correct of 33%, 5%, 18%, and 44%, respectively, to the analysts' forecasts. Given these probabilities, what is Fluorine Chemical's expected return for the coming year?
The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. A hedge fund manager believes that Waterworks is underpriced, with an alpha of 2% over the coming month. Beta 0.75 R-square 0.65 Required: a-1. If he holds a $8.0 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, how many contracts should he enter? The S&P 500 currently is at 2,000 and the contract multiplier is $50. Number of contracts Standard Deviation of Residuals 0.07 (1.e., 7% monthly) a-2. Should he buy or sell contracts? O Buy Sell Probability b. Assuming that monthly returns are approximately normally distributed, what is the probability that this market-neutral strategy will lose money over the next month? Assume the risk-free rate is 0.7% per month. (Do not round intermediate calculations. Round your percentage answer to 2 decimal places.) %
You are concerned about the market volatility but have found stocks that are attractively priced. In additionto cash, your portfolio will have securities both on the LONG and SHORT sides. You want to set up your LONG/SHORT portfolio with some constraints. You will set aside 12.27% of the equity as a cash reserve to cushion any adverse margin changes and to pay any associated fees. You will maximize your buying and selling power (i.e. what you can purchase and sell on margin) using the remaining equity and loans from the broker. Your account's beginning equity is $201,290 all in cash before you start trading. You will set up your 100% beta-neutral trade on full margin, and the margin requirements are 50% on both sides. Assume that the LONG side has a weighted average beta of 1.35, while the SHORT side has a weighted average beta of 1.00. What is the value of your account's total liabilities immediately after you set up the portfolio? O $250,234 $257,185 $264,136 $271,087 $278,038
You are an analyst working for a mutual fund. Your job is to select stocks for the fund. You want to select only one of the following tech stocks to add into your current portfolio: PhoneExp and VegMeat. Both stocks are similar along many metrics. They are all in the technology space and have been growing very fast over the past few years. However, it is hard to get all the information for these stocks, and so far you have collected only the following relevant information to help you make the decision:PhoneExp is a tech firm that focuses on developing and integrating mobile apps. Reading through analyst reports and based on your own judgement, you think the cost of equity for PhoneExp is 12%. PhoneExp estimated earnings per share next year are $10. It pays all its earnings as dividends.VegMeat is a biotech firm that promotes and advocates sustainable food choices. Currently, VegMeat stock is trading at $100/share, with estimated earnings next year of $10/share. You read from their…
You work as an economic analyst for an investment firm. You believe there are four possible states for the economy over the next year: Boom, Good, Poor, Bust. Your colleague Tosha has estimated the returns for three stocks based on those four scenarios. One of your clients has a portfolio that is 20.00% invested in Stock A and 30.00% invested in Stock C. The rest of your client's portfolio is invested in Stock B. Use the information below to calculate the expected return, variance, and standard deviation on your client's portfolio. 1. First fill in the missing probability and portfolio weight (cells D19 and F22). 2. Calculate the actual return for the portfolio in each state. 3. Use those portfolio returns and the probabilities to calulcate the portfolio's expected return using the SUMPRODUCT function. 4. Calculate the squared deviation from the mean for each state of the economy. 5. Use the SUMPRODUCT function to get the variance (the probability weighted average of the squared…
I am having trouble solving this problem. Can you please provide me with some help? Thank you. I appreciate it. You estimate that the expected return of MSFT stock is 4%, and standard deviation of MSFT stock is 9%. The expected return of AAPL stock is 3%, and standard deviation of MSFT stock is 8%. If the correlation between AAPL returns and MSFT returns is 80%, what is the expected return and standard deviation of a portfolio with $4,000 invested in MSFT and $6,000 invested in AAPL?
An investor receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information? The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet." This investment newsletter is most likely correct because they most likely have some special knowledge about the stock. It is common for individual stocks to double the return of the S&P 500 and still be a "safe bet."
Consider a portfolio manager with a $20,500,000 equity portfolio under management. The manager wishes to hedge against a decline in share values using stock index futures. Currently a stock index future is priced at 1250 and has a multiplier of 250. The portfolio beta is 1.25. Calculate the number of contract required to hedge the risk exposure and indicate whether the manager should be short or long. 82 contracts long. 100 contract short. 82 contracts short. 100 contracts long.
None
You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Yellen and Zagami) who (actively) manage two funds which are considering. Your associates have assembled the following historical average return, standard deviation, and CAPM beta estimates for these two fund managers over the past five years. In addition, you have estimated that the risk premium for the market portfolio is 5.12% and the risk-free rate is currently 4.14%. What is Ms. Yellen's average "alpha" for the period. Report your answer in percentage format rounded to three decimal places. (For example.1234 should be entered as "12.3"). Fund Manager Actual Avg. Return Standard Deviation Ms. Yellen 11% Mr. Zagami 8.24% Answer: 11.07 8.75% Beta 1.18 0.9
A hedge fund has created a portfolio using just two stocks. It has shorted $34,000,000 worth of Oracle stock and has purchased $77,000,000 of Intel stock. The correlation between Oracle's and Intel's returns is 0.63. The expected returns and standard deviations of the two stocks are given in the following table below. Suppose the correlation between Intel and Oracle's stock increases, but nothing else changes. Would the portfolio be more or less risky with this change?
Your broker has developed a list of firms, their betas, and the return he expects the stock to yield over the next twelve months (labeled "Expected Return"). You have estimated that the risk-free rate is 5% and the return to the market will be 12%. Assuming that CAPM is correct, which stock should you purchase? Expected Return 10.5% Delta Vanlines 1.25 13.0 % 1.60 16.0% Firm Beta Anderson, Inc. 0.90 Nathan's Bakeries Z-man Electronics O Delta Vanlines 1.90 19.0% All of the stocks, Anderson, Inc. O Nathan's Bakeries OZ-man Electronics

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