Suppose stock returns can be explained by the following three-factor model:R=RF+ B1F+B2F2-B3F3Assume there is no firm-specific risk. The information for each stock is presented here:ẞ1B2ẞ3Stock A 1.75Stock B .82Stock C .83.75$.501.35-.70-.331.44The risk premiums for the factors are 7.1 percent, 6.3 percent, and 6.7 percent,respectively. You create a portfolio with 20 percent invested in Stock A, 20 percentinvested in Stock B, and the remainder in Stock C. The risk-free rate is 4.2 percent. Whatis the beta for each factor for the return on your portfolio? (Do not round intermediatecalculations and round your answers to 2 decimal places, e.g., 32.16.)Factor F1Factor F2Factor F3What is the expected return on your portfolio? (Do not round intermediate calculationsand enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)Expected return%

Stock A: 18.00%Stock B: 23.22%Stock C: -1.63%For Stock A:R_A = R_f + beta_{A1}F_1 + beta_{A2}F_2 -…

Answered: Suppose stock returns can be explained…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Economics question!!!
Discuss: i) diversifiable risk; ii) market risk; iii) systematic risk iv) unsystematic risk;
9) A risk-neutral individual with current wealth w has already decided investing all his wealth in a project that has two possible net wealth outcomes wn and we (with probabilities pr and pe, respectively) where wr > w > we > 0, PrPe E (0,1), and pr + Pe = 1. Before he invests, he realises that there is a source of information that tells the individual which outcome will be realised with truth, what is the value of this information for the individual? a) pe(@ – w;), b) (Pn – Pe)w, c) Phwn + PeWe – w, d) Pr(w – wn).
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term bond fund, and the third is a money market fund that provides a safe return of 8%. The characteristics of the risky funds are as follows: Expected Return Standard Deviation Stock fund (S) 20% 30% Bond fund (B) 12 15 The correlation between the fund returns is 0.10. a-1. What are the investment proportions in the minimum - variance portfolio of the two risky funds. (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.) Portfolio invested in the stock Portfolio invested in the bond a-2. What are the expected value and standard deviation of the minimum variance portfolio rate of return? (Do not round intermediate calculations. Enter your answers as percentage rounded to 2 decimals.) Expected return % Standard deviation %
Consider the following portfolio choice problem. The investor has initial wealth w andutility u(x) = (x^n) /n. There is a safe asset (such as a US government bond) that has netreal return of zero. There is also a risky asset with a random net return that has onlytwo possible returns, R1 with probability 1 − q and R0 with probability q. We assumeR1 < 0, R0 > 0. Let A be the amount invested in the risky asset, so that w − A isinvested in the safe asset.1) What are risk preferences of this investor, are they risk-averse, riskneutral or risk-loving?2) Find A as a function of w.
I need help with question d
(a) Calculate the risk-premium on this portfolio and provide a brief interpretation of it (b) Calculate the minimum sale price of the capital assets for the average investor.
advanced microeconomics, uncertainty
Required Return If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?
Millicent’s utility function is U(w) = W0.5 , where W is her wealth. She owns a “pure water” producing firm that will be worth GH100 or 0 Ghana cedis next year with equal probability. a. Suppose her firm is the only asset she has. What is the lowest price at which she will agree to sell her pure water? (Hint: price=amount that will give her the same expected utility) b. Assume that she has GH200 safely stored under her mattress, find the new lowest price at which she will agree to sell her “pure water” producing firm c. From your answers in parts (a) and (b), what is the relationship between her wealth and her degree of risk aversion?
Give 1 problem solving example of Expect Value Maximization and its solutions using this formula.
Question 11 The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is a) 36.30%. b) 5.84%. c) 19.60%. d) 24.17%. e) 26.0%.

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