The table uses the standard deviation of the portfolio's return as a measure of risk. A normal random variable, such as a portfolio's return, stayswithin two standard deviations of its average approximately 95% of the time.Suppose Valerie modifies her portfolio to contain 75% diversified stocks and 25% risk-free government bonds; that is, she chooses combination D.The average annual return for this type of portfolio is 13%, but given the standard deviation of 15%, the returns will typically (about 95% of the time)vary from a gain ofto a loss of Suppose Valerie is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversifiedstocks. The following table shows the risk and return associated with different combinations of stocks and bonds.CombinationABCDEFraction of Portfolio in DiversifiedStocks(Percent)0255075100Average AnnualReturn(Percent)2.506.009.5013.0016.50As the risk of Valerie's portfolio increases, the average annual return on her portfolioStandard Deviation of Portfolio Return(Risk)(Percent)05101520Suppose Valerie currently allocates 25% of her portfolio to a diversified group of stocrises 75% of her portfolio to risk-free bonds; that is, shechooses combination B. She wants to increase the average annual return on her port falls m 6% to 13%. In order to do so, she must do which ofthe following? Check all that apply.Accept more riskSell some of her stocks and use the proceeds to purchase bondsSell some of her stocks and place the proceeds in a savings accountSell some of her bonds and use the proceeds to purchase stocks

Capital Allocation Line The Capital Allocation Line (CAL) is a graphical presentation of the various…

Suppose Valerie is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B с D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.50 6.00 9.50 13.00 16.50 As the risk of Valerie's portfolio increases, the average annual return on her portfolio_ Suppose Valerie currently allocates 25% of her portfolio to a diversified group of stoc chooses combination B. She wants to increase the average annual return on her port the following? Check all that apply. Accept more risk Sell some of her stocks and use the proceeds to purchase bonds Sell some of her stocks and place the proceeds in a savings account Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 rises 75% of her portfolio to risk-free bonds; that is, she falls m 6% to 13%. In order to do so, she must do which of

Suppose Valerie is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B с D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.50 6.00 9.50 13.00 16.50 As the risk of Valerie's portfolio increases, the average annual return on her portfolio_ Suppose Valerie currently allocates 25% of her portfolio to a diversified group of stoc chooses combination B. She wants to increase the average annual return on her port the following? Check all that apply. Accept more risk Sell some of her stocks and use the proceeds to purchase bonds Sell some of her stocks and place the proceeds in a savings account Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 rises 75% of her portfolio to risk-free bonds; that is, she falls m 6% to 13%. In order to do so, she must do which of

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Which of the following is INCORRECT? a All of a stock's risk could be unsystematic. b. A negative beta stock has an expected return less than the risk-free rate. c. Anticipated returns on any given stock are always greater than 0. d. Two assets with a correlation of -1 could be combined to create a portfolio with a standard deviation of zero (no risk). 2. Which of the following measures the total risk of a portfolio? a. Beta b. Standard Deviation c. Correlation Coefficient d. Alpha 3. Which of the following stocks have the highest systematic risk? a A stock with high correlation to the market and high returm volatility. b. A stock with low correlation to the market and a high return volatility. c A stock with high correlation to the market and a low return volatility. d. A stock with low correlation to the market and a low return volatility. 4. Which of the following companics have the lowest systematic risk? a A company that sells soups (Campbells), beta=0.60 b. A coffee company…
2. In the game between the manager and the stockholders of Ross (1977), the future value of the firm is random and uniformly distributed on the interval [0, t], where t is the upper bound of V1. The manager knows the value of t, but the stockholders do not, and this is the asymmetry of information. In observing the debt level F chosen by the manager, the stockholders think that the value of t is given by a[F]. In the lecture on the model of Ross, it was shown that a[F] has the following form: a[F] = 4 LF+c?. Yo Compute the debt level F that maximizes the manager's expected payoff.
The following table provides the annual profits of two startup tech firms along with their present value of profits calculated at an interest rate of 5 percent. Which firm would be your recommendation for an acquisition? Explain. Year Firm AProfits Firm BProfits 1 $1,000,000 $5,000,000 2 $1,200,000 $2,000,000 3 $1,400,000 ($800,000) 4 $1,500,000 $500,000 5 $1,600,000 ($100,000) PV $5,737,885 $6,217,892
What is the present value of a firm with a four-year life span that earns the following stream of expected profit? Use a risk-adjusted discount rate of 10 percent. Treat all profits as being received at year-end. Year 1 - $20 000 Year 2 - $40 000 Year 3 - $70 000 Year 4 - $90 000
A 33.
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%.