2. Please help and explain Portfolio Theory with a Riskless Asset2. Suppose that a fund that tracks the S&P has mean E(Rm) = 16% and standarddeviation σM = 10%, and suppose that the T-bill rate Rf = 8%. Answer the followingquestions about efficient portfolios:1(a) What is the expected return and standard deviation of a portfolio that is totallyinvested 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-freerate?(d) What are the weights for investing in the risk-free asset and the S&P that producea standard deviation for the entire portfolio that is twice the standard deviationof the S&P? What is the expected return on that portfolio?

C) ER will be8% + 1.25(16%-8%) = 18%*beta = -25%(0) + 125%(1) = 1.25SD will be125% x 10% = 12.5% D)…

Answered: Portfolio Theory with a Riskless Asset…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

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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
4. Suppose that there are 2 assets with ri 012 = 0.005. = 0.20, 01 = = 0.40, 2 = 0.10, 02 = 0.25 and (a) If ro = 0.02, what are the market portfolio return and variance? What are the corre- sponding weights (i.e. how much to invest in asset 1, asset 2, and the risk-free asset to get the market portfolio)? Answer. (b) If ro 0.05, what are the market portfolio return and variance? What are the corre- sponding weights? Answer.
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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.
see attached image.
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?
An efficient portfolio is one that: Select one: a. maximises return for a given level of risk. b. maximises risk for a given level of return. c. minimises risk for a given rate of return. d. Both A and C. are efficient portfolios.
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Certainty equivalents in portfolio theory
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Suppose you have an investment portfolio with fraction x invested in a market portfolio and (1-x) in a risk- free asset. Increasing fraction x invested in the market portfolio and consequently decreasing (1-x) invested in the risk-free asset shall (select any correct answer, if there are multiple correct answers) Select one or more: O decrease the Sharpe ratio of the resulting portfolio O decrease the expected return of the resulting portfolio increase the Sharpe ratio of the resulting portfolio increase the expected return of the resulting portfolio Dincrease the risk of the resulting portfolio
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