Please correct answer and don't use hand rating Suppose Stock AAA has monthly returns distributeduniformly between -4% and 10% while Stock BBB has monthly returns distributed uniformlybetween -6% and 12%. Furthermore, suppose that the correlation of the two stock returns isequal to 0.8. Let the risk free rate be is equal to 1%. Find the Sharpe ratio of a portfolio thatplaces equal weight (50% each) in Stock AAA and Stock BBB.NOTE: the variance of a continuous uniform random variable between a and b is given by var=*(112) (b a)2-

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Answered: Suppose Stock AAA has monthly returns…

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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Suppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively.(a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?
Portfolios A and B are both well-diversified. The risk-free rate is 8%. The return for the market is 10%. Portfolio A has an expected return of 15% and beta of 1.1. Portfolio B has an expected return of 9% and beta of 0.20. Portfolio A's variance is 9%, whilst Portfolio B's variance is 5.5%. Calculate for Portfolio A and Portfolio B the following: 1. Sharpe's Measure, 2. Treynor's Measure, 3. Jensen's Measure. Which is the better portfolio according to each measure?
The variance (risk) of an N-asset portfolio can be written as: o² = 2 + 2/11 -Cov where o² is the average variance of stocks in the portfolio and Cov is the average covariance between each pair of stocks in the portfolio. This result suggests that a well-diversified portfolio with a sufficiently large number of stocks will have O a zero total risk (variance) a zero covariance with other assets a zero diversifiable (nonsystematic) risk a zero market (systematic) risk
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) =???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)Question 2. Foreign exchange marketsStatoil, the national…
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Suppose that optimal risky portfolio has an expected return of 16% and a varianceof 0.04. The risk-free rate is 4%.a) Find the slope of Capital Market Line (Optimal Capital Allocation Line)?b) What is the expected return of a portfolio C, which is on Capital Market Line and has astandard deviation of 0.08?
Consider a long-short portfolio. Beta of this portfolio is zero and its volatility is 20% . What is the portfolio-specific (unsystematic) variance of this portfolio
An investiment portfolio consists of two securities, X and Y. The weight of X is 30%. Asset X's expected return is 15% and the standard deviation is 28%. Asset Y's expected return is 23% and the standard deviation is 33%. Assume the correlation coefficient between X and Y is 0.37. A. Calcualte the expected return of the portfolio. B. Calculate the standard deviation of the portfolio return. C. Suppose now the investor decides to add some risk free assets into this portfolio. The new weights of X, Y and risk free assets are 0.21, 0.49 and 0.30. What is the standard deviation of the new portfolio?
A person is interested in constructing a portfolio. Two stocks are being considered. Letx = percent return for an investment in stock 1, and y = percent return for an investment instock 2. The expected return and variance for stock 1 are e(x) = 8.45% and Var(x) = 25.The expected return and variance for stock 2 are e(y) = 3.20% and Var(y) = 1. Thecovariance between the returns is sxy = −3.a. what is the standard deviation for an investment in stock 1 and for an investment instock 2? Using the standard deviation as a measure of risk, which of these stocks isthe riskier investment?
Suppose the risk free rate is 5% and the market portfolio has an expected return of 10%. Portfolio Z has a correlation coefficient with the market of 0.1 and a variance of 0.16. The market portfolio has a variance of 0.09. According to the CAPM, what is the beta of portfolio Z?
Portfolio Suppose rA ~ N (0.05, 0.01), rB ~ N (0.1, 0.04) with pA,B = 0.2 where rA and rB are CCR’s. a) Suppose you construct a portfolio with 50% for A and 50% for B. Find the variance of the portfolio CCR. b) Find the portfolio expected gross return. c) Find the expected portfolio CCR.
c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of .0382. Portfolio Z has a correlation coefficient with the market of .28 and a variance of .3285. According to the capital asset pricing model, what is the expected return on Portfolio Z?

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