Suppose that there are only two risky assets in the economy: stock X and stock Y. In addition, there is a risk-free asset Z. When the capital market is in equilibrium, the following is observed about the portfolios held by Investors A and B: Investor A (a) (b) (c) Amount invested in X Amount invested in Y Amount invested in Z Total value of portfolio £200 £300 £500 £1,000 Investor B ? ? £2,000 £10,000 According to the Capital Asset Pricing Model, what must be the values of Investor B's holdings of stock X and stock Y? Which investor is more risk-averse? Explain why. The expected rate of return on Investor A's portfolio is 8.5%, and that on Investor B's portfolio is 10%. How should Investor B adjust her portfolio to obtain an expected rate of return of 15% while ensuring that her portfolio is mean-variance efficient? What are the amounts invested X, Y and Z in Investor B's new portfolio?

Suppose that there are only two risky assets in the economy: stock X and stock Y. In addition, there is a risk-free asset Z. When the capital market is in equilibrium, the following is observed about the portfolios held by Investors A and B: Investor A (a) (b) (c) Amount invested in X Amount invested in Y Amount invested in Z Total value of portfolio £200 £300 £500 £1,000 Investor B ? ? £2,000 £10,000 According to the Capital Asset Pricing Model, what must be the values of Investor B's holdings of stock X and stock Y? Which investor is more risk-averse? Explain why. The expected rate of return on Investor A's portfolio is 8.5%, and that on Investor B's portfolio is 10%. How should Investor B adjust her portfolio to obtain an expected rate of return of 15% while ensuring that her portfolio is mean-variance efficient? What are the amounts invested X, Y and Z in Investor B's new 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

See similar textbooks

Similar questions

Please solve M14 and M15
Question 6?
You hold the following portfolio: Total portfolio amount 500,000 Amount invested in risk-free assets 100,000 Amount invested in risky securities 400,000 Amount invested in corporate bonds 100,000 Amount invested in stocks 300,000. If you were to reduce your holdings of risky assets by 0.1, how would the weights and amounts of your portfolio shift?
Q1 Suppose that each of two investments has a 2% chance of a loss of $4 million and a 98% chance of a loss of $2 million. They are independent of each other. What is the expected shortfall for a portfolio consisting of the two investments when the confidence level is 95%? Round your answer to two decimal places. Answer/
Bill buys $500 worth of the T-bill. O Bill invests $1000 in the risky portfolio. Bill borrows $250 at the risk free rate. QUESTION 13 portroll Which of the following statements is correct? O All portfolios on the capital allocation line have the same Sharpe ratios O Short selling the risk-free asset is equivalent to lending money at the risk free rate O In a portfolio, asset weights must sum up to 0 O the capital allocation line is downward sloping QUESTION 14
Radhubhai
Which of the following statements is false? A. Basel II use the value at risk (VaR) with a one-year time horizon and a 99.9% confidence level for calculating capital for credit risk and operational risk. B. 20 BP = 0.2% C. Basel I is increasing the amount of capital that banks are required to hold and the proportion of that capital that must be equity. D. Model-building approach is a model for the joint distribution of changes in market variables and using historical data to estimate the model parameters.
The following payoffs are observed in frictionless markets: Dividend next period Price next period Price today Asset 1 4 84 80 Asset 2 5 105 P2 A. The rate of return on asset 2 equals 5%. B. In the absence of arbitrage opportunities, p2= 100. C. In the absence of arbitrage opportunities, the rate of return on asset 1 equals 8%. D. In the absence of arbitrage opportunities, p2= 110. E. None of the above.
Figure 2 (a) Financial engineering deals with the design of new assets. Draw the payoff (at t=1) of the following butterfly spread: payoff of portfolio Purchase 1 call with exercise price a Sell 2 calls with exercise price (atb)/2 Purchase 1 call with exercise price b as a function of the underlying stock price S at t=1 where a=120 and b=140. (b) An individual agent thinks that there is a high probability that the Dow Jones will have a payoff (or points) between a=34,000 and b-36,000 at t=1. 1=nd Design a digital option (see Figure 1) as a sequence of calls on the Dow that converges to a pure bet on getting $1 on the interval [34,000, 36,000]. ie, if the Dow lies between SE[34,000, 36,000] at t=1, then the portfolio of calls pays off exactly $1. The payoff is 0 otherwise. a+8 Figure 1 (Digital option) payoff a=34,000 b-36,000 S. Hint: You have to modify the sell strategies of a butterfly spread to obtain a payoff as given in Figure 2 and then adjust n and 8 appropriately.
Question 4?
Question Five: Which of the following is not an assumption that underpins the capital asset pricing model (CAPM)? Investors behave in accordance with Markowitz mean-variance portfolio theory. Investors are rational and risk averse. Investors all invest for the same period of time. Investors have heterogeneous expectations about expected returns and return variances for all assets. There is a risk free rate at which all investors can borrow or lend any amount. Capital markets are perfectly competitive, frictionless and efficient. Question Six: Which of the following expressions best describes the slope of the security market line? The slope of the security market line is equal to the Sharpe ratio. The slope of the security market line is equal to the Treynor ratio. The slope of the security market line is equal to alpha. The slope of the security market line is equal to the market risk premium. The slope of the security market line is equal to the standard deviation of the risky…
The following question illustrates the APT. Imagine that there are only two pervasive macroeconomic factors. Investments X, Y, and Z have the following sensitivities to these two factors: Investment b1 b2 X 1.75 0 Y −1.00 2.00 Z 2.00 1.00 We assume that the expected risk premium is 7.8% on factor 1 and 11.8% on factor 2. Treasury bills obviously offer zero risk premium. According to the APT, what is the risk premium on each of the three stocks? Suppose you buy $500 of X and $125 of Y and sell $375 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? Suppose you buy $200 of X and $150 of Y and sell $100 of Z. What is the sensitivity of your portfolio to each of the two factors? What is the expected risk premium? Finally, suppose you buy $400 of X and $50 of Y and sell $200 of Z. What is your portfolio's sensitivity now to each of the two factors? And what is the expected risk premium?

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

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

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