General Accounting Question Solution 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) * (ba)2

Answered: Image /qna-images/answer/7d3fd3d4-fbeb-483a-80e0-2730e8a43f2d.jpg

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

See similar textbooks

Similar questions

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?
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
Consider a portfolio formed of two risky assets whose returns have a correlation of 0.5. What can be said of the standard deviation of the global minimum-variance portfolio formed with these two risky assets? It's greater than zero. It s equal to zero. O It s between - 1 and +1. O It's the weighted average of the standard deviations of the two risky assets.
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…
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?
Consider the two (excess return) index model regression results for well-diversified portfolios A and B: RAt = 0.02 + 1.0 × Rmt + eAt RBt = 0.03 + 0.85 × Rmt + eBt In addition, you know that the standard deviation of the index is 20%. Calculate the covariance between the excess returns of portfolio A and B. Briefly discuss your results.
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?
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?
Suppose the market risk premium is 9 % and also that the standard deviation of returns on the market portfolio is 0.26 . Further assume that the correlation between the returns on ABX (Barrick Gold) stock and returns on the market portfolio is 0.62 , while the standard deviation of returns on ABX stock is 0.36 . Finally assume that the risk-free rate is 2 %. Under the CAPM, what is the expected return on ABX stock? (write this number as a decimal and not as a percentage, e.g. 0.11 not 11%. Round your answer to three decimal places. For example 1.23450 or 1.23463 will be rounded to 1.235 while 1.23448 will be rounded to 1.234)
Consider the two (excess return) index model regression results for A and B. RA= 0.9% + 1.1RM , R-square = 0.590, and Residual Standard Deviation = 11% RB= -1.4% + 0.6RM, R-square = 0.456, and Residual Standard Deviation = 9.2% Which stock has more firm-specific risk, market risk, and greater fraction of return variability for market movement? Also, if rf were constant at 4.4% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A (write as percentage, rounded to 2 decimal places)?
Given the following information on three stocks assuming: Stock Expected Return A 0.06 0.1 0.267 Assume further the following portfolio co-variances: AB = 0, AC = 0 and BC -0.05333. Now suppose you diversify into two securities. Given the three choices of possible portfolio combinations, can any portfolio be eliminated because it is dominated by at least one of the other portfolio combinations? Assume equal weights. Select one: B с Standard Deviation a. Portfolio (A,B) should be eliminated b. Portfolio (A,C) should be eliminated c. Portfolio (B,C) should be eliminated d. Portfolio (A,B) and Portfolio (A,C) should be eliminated e. Portfolio (A,B) and Portfolio (B,C) should be eliminated f. Portfolio (A,C) and Portfolio (B,C) should be eliminated No Portfolio dominates the others. 0 0.25 0.375

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS