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

3. The market has three assets. In addition, PAB = 0. F A B 0.2 0.3 1 3 E(r) 0.1 0 0 (a) If the investor can invest in the risk-free asset and one of the risky assets (either A or B, but not both). Will she choose A or B to construct a portfolio with the risk-free asset? Why? (Hint: you can draw a graph to answer this question.)
Consider the following financial market with two risky assets x and y as well as a risk-free asset f: E[r]. x (10%, 8%) •z (6.6%, 6.3%) y (8%, 5%) (0%, 3%) f Is it possible to construct portfolio z with existing assets? Explain.
Assume that you are considering investing in two risky assets, namely PKX and XIY, with the following probability distribution. Assume that short selling is allowed. Stock РКХ XIY State of the world Probability Return (%) Return (%) 1 0.25 18 2 0.30 5 -3 3 0.20 12 15 4 0.10 4 12 0.15 6 1 1. Calculate the expected return and risk for each of these assets. Interpret. 2. Consider a portfolio that contains PKX and XIY. Note that XIY comprises 30% of the portfolio. What is the expected return and risk of this portfolio? 3. How will your answer in (2) change if XIY comprises 20% of the portfolio only? Comment on your findings.
Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Рayolf Price Security State 1 State 2 PA=2 A 4 2 PB-3 B a. Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure socurities by arbitrage.
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows: Correlation = -1 Stock Rate of return B O Yes ● No Expected Return Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) % 6% 12% Standard Deviation 25% 75% b. Could the equilibrium rf be greater than rate of return?
Pls do B C D. Do fast its urgent and i will give like for sure
2
Q: Suppose an investor invests her money in three different assets-lands, bonds and stocks- and three possible states can occur. The return matrix of these three assets by states is as follows: (1.05 1.52 1.37 0.90 1.20 1.10 1.02 1.24 1.16/ Do state prices exist? Is there an arbitrage portfolio? If yes, give one example. If no, explain why
2C) Assume that the CAPM holds in the economy. The following data is available about the market portfolio, the riskless rate, and two risky assets, W and X: The market portfolio has a standard deviation equals to 10%, stock W has an expected return equals to 16%, standard deviation equals to 12%, and beta equals to one, stock X has a standard deviation equals to 6% and beta equals to 0.7. The risk-free rate is 3%. What is the expected return and the beta of the market portfolio? What is the expected return on asset X? Does asset W lie on the Capital Market Line? Explain why or why not. Suppose you invested $100,000 in these two stocks. The beta of your portfolio is 1.25. How much did you invest in each stock? What is the expected return of this portfolio?
Assume the market has the following assets: Asset Expected Return (%) Standard Deviation (%) X 18% 10% Y 14% 8% Z 10% 12% Jayaraman is considering to invest in only ONE (1) asset from the list above. Explain his choice if he is (i) risk averse (ii) risk neutral (iii) risk seeking
Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Payoff Price Security A в State 1 State 2 PA = 2 Pg = 3 4 2 3 4 a) Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure securities by arbitrage.
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rƒ. The characteristics of two of the stocks are as follows: Correlation = -1 Stock A B Rate of return Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) Yes No X Answer is not complete. Expected Return 9% 13% % Standard Deviation 45% 55% b. Could the equilibrium rƒ be greater than rate of return?

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