Portfolio Theory with a Riskless Asset 2. Suppose that a fund that tracks the S&P has mean E(Rm) = 16% and standard deviation σM = 10%, and suppose that the T-bill rate Rf = 8%. Answer the following questions about efficient portfolios: 1 (a) What is the expected return and standard deviation of a portfolio that is totally invested in the risk-free asset? (b) What is the expected return and standard deviation of a portfolio that has 50% of its wealth in the risk-free asset and 50% in the S&P? (c) What is the expected return and standard deviation of a portfolio that has 125% of its wealth in the S&P, financed by borrowing 25% of its wealth at the risk-free rate? (d) What are the weights for investing in the risk-free asset and the S&P that produce a standard deviation for the entire portfolio that is twice the standard deviation of the S&P? What is the expected return on that portfolio?

Portfolio Theory with a Riskless Asset 2. Suppose that a fund that tracks the S&P has mean E(Rm) = 16% and standard deviation σM = 10%, and suppose that the T-bill rate Rf = 8%. Answer the following questions about efficient portfolios: 1 (a) What is the expected return and standard deviation of a portfolio that is totally invested in the risk-free asset? (b) What is the expected return and standard deviation of a portfolio that has 50% of its wealth in the risk-free asset and 50% in the S&P? (c) What is the expected return and standard deviation of a portfolio that has 125% of its wealth in the S&P, financed by borrowing 25% of its wealth at the risk-free rate? (d) What are the weights for investing in the risk-free asset and the S&P that produce a standard deviation for the entire portfolio that is twice the standard deviation of the S&P? What is the expected return on that portfolio?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 7MC: Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the...

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Consider an economy with a (net) risk-free return r1 = 0:1 and a market portfolio with normally distributed return, with ErM = 0:2 and 2M = 0:02. Suppose investor A has CARA preferences, with risk aversion coe¢ cient equal to 1 and an endowment of 10. a) Write down the maximization problem for the investor. b) Determine the amount invested in the risky portfolio and in the risk-free asset. c) Suppose another investor (B) has a coe¢ cient of absolute risk aversion equal to 2 (and the same endowment 10). Compute his optimal portfolio and compare it to that of investor A. Explain the di§erent results for investors A and B. d) Finally, consider Investor C with mean-variance preferences Ec V ar(c) (and endowment 10). Compute his optimal portfolio and compare it to that of investors A and B (as obtained in questions b and c). Compare your result with those obtained for investors A and B.
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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?
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Certainty equivalents in portfolio theory
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