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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Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
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Required information
Section Break (8-12)
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below.]
A pension fund manager is considering three mutual funds.
The first is a stock fund, the second is a long-term government
and corporate bond fund, and the third is a T-bill money
market fund that yields a sure rate of 5.5%. The probability
distributions of the risky funds are:
Stock fund (S)
Bond fund (B)
The correlation between the fund returns is 0.15.
Problem 6-10 (Static)
Expected
Return
Sharpe ratio
15%
9%
Standard
Deviation
32%
23%
Required:
What is the Sharpe ratio of the best feasible CAL? (Do not round intermedia
calculations. Round your answer to 4 decimal places.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe75191c5-40e7-4adb-bdf7-41817f549e14%2Fbd522084-7078-4c2c-ba6f-e362c2ec62cc%2Fjxv3a7k_processed.jpeg&w=3840&q=75)
Transcribed Image Text:!
Required information
Section Break (8-12)
[The following information applies to the questions displayed
below.]
A pension fund manager is considering three mutual funds.
The first is a stock fund, the second is a long-term government
and corporate bond fund, and the third is a T-bill money
market fund that yields a sure rate of 5.5%. The probability
distributions of the risky funds are:
Stock fund (S)
Bond fund (B)
The correlation between the fund returns is 0.15.
Problem 6-10 (Static)
Expected
Return
Sharpe ratio
15%
9%
Standard
Deviation
32%
23%
Required:
What is the Sharpe ratio of the best feasible CAL? (Do not round intermedia
calculations. Round your answer to 4 decimal places.)
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