Problem 3: Evaluating portfolio performanceAssume you have two investment opportunities.1. Corporate Disasters (CD) has expected returns E(RcD) = 4% and standard deviation ofreturns 9%.2. Nevada beach front properties (NBF) has expected returns E(RygF) = 10% and standarddeviation of returns 18%Risk free rate is R; = 1%.a) Calculate Sharpe ratios of these two portfolios.b) Assume you can invest only in one of those companies (and a risk free rate). Assumeyour target rate of return is 6%. Calculate portfolios with CD&RF and NBF&RF whichwould deliver this return. Which portfolio has smaller standard deviation and why?c) Assume you have a portfolio which is not efficient. Assume Corporate Disasters havemarket beta of ßep = 0.5 and Nevada beach front properties have market betaBNef = 4. Calculate Treynor measures for those securities. Which one should you add toyour portfolio to increase the Sharpe ratio.

Sharpe Ratio = [E(R) - Rf] / σ where E(R) is the expected return of the security, σ is the standard…

Answered: Problem 3: Evaluating portfolio…

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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(Portfolio VaR) Suppose there are two investments A and B. Either investment A or B has a 4.5% chance of a loss of $15 million, a 2% chance of a loss of $2 million, and a 93.5% change of a profit of $2 million. The outcomes of these two investments are independent of each other.
b. As an equity portfolio manager, you may use certain risk-adjusted performance measures. Describe and discuss the following measures of performance evaluation! Treynor Index, William Sharpe, Michael Jensen Using the following table evaluate which is better than other using three different measure of performance evaluation. Asset X E(R)% 12 beta Stdv 1.25 16 Y 11 1.0 12 Risk-free 3 0 0 Market index 12 1 12
In the following exercise, separate the investments according to the type of Keynesian demand they are: Transactions (0% to 5%), Precautionary (6% to 9%), and Speculative demand (greater than 10%). Investment in each category has the same risk. So you want to invest in the highest return for the same risk. Take each demand type and choose the highest return and put that amount into the investment. For example, if Bond fund A has a return of 4% and Fund B has a return of 5%, they have the same risk, so you would put $70 into bond fund B. You have the following investments Opportunities ad returns. Fidelity Bonds 11% Fidelity Magellan 9% Putman Bonds one 4% Putman bonds Two 12% Growth Stock One 15% Growth and Income 8% Income Fund 3% Putman Growth…
You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset: a. Fill in the missing values in the table. (Leave no cells blank - be certain to enter 0 wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Security Firm A Firm B Firm C The market portfolio The risk-free asset Expected return Expected Return * With the market portfolio Sell Buy 0.118 0.132 0.113 0.12 0.05 % Expected return Standard Deviation b-1. What is the expected return of Firm A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 0.23 0.74 0.74 0.23 0 % Correlation* 1.02 0.42 0.27 1 0 b-2. What is your investment recommendation regarding Firm A for someone with a well-diversified portfolio? b-3. What is the expected return of Firm B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2…
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You are evaluating various investment opportunities currently available and you have the fol-lowing information about five different well-diversified portfolios of risky assets. Interest raterf = 3% a) Calculate the Sharpe ratio for each portfolio. (b) Explain which of these five portfolios is most likely to be the optimal risky portfolio. (c) Suppose you are willing to invest with an expected return of 6%. What would be theinvestment proportions in the riskless asset and the optimal risky portfolio? What is thestandard deviation of the return for this investment?
4. What follows are several portfolios; each is denoted by the term Port. Graph the profit curve at t = T for each of them. Determine the strengths and weaknesses of each portfolio. Namely, explain what a reasonable investor must be expecting to adopt each portfolio. In this listing, CE denotes a Call with strike price E, -CE represents going short on a Call-the Call was sold, PE is a put, -PE is going short on a put, and the numbers E indicate the strike price. (a) A "Long Call" is Port = CE- (b) A "Short Call" is Port = -CE. (c) A "Long Put" is Port = PE. (d) A "Short Put" is Port = - PE. (e) A "Long Straddle" is Port = PE + C£; namely, buy both a Put and Call with the same strike price. (f) A "Short Straddle" is Port = -P - C. (g) A "Long Strangle" is Port = P£₁ +C£₂; namely, it is a purchase of a put at strike price E₁, which is less than the strike price of a Call at E2 (h) a "Short butterfly" is Port = −CE₁ +2CE₂ - CE3 where E₁ < E₂ < E3. (i) A "Long butterfly" is Port = CE₁…
In order to create an efficient set of portfolios thru optimization using concepts from Markowitz portfolio theory, you would need to forecast only 2 variables including expected return and standard deviation or variance for the asset classes or securities in focus. True or false
In portfolio management, risk reduction is achieved by investing in a portfolio in which the securities Question 3 options:1) have a high covariance 2) have a high correlation coefficient 3) have a low coefficient of variation 4) have a lowcovariance 5) are perfectly positively correlated.
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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