(Using the CAPM to find expected returns) Sante Capital operates two mutual funds headquartered in Houston,Texas. The firm is evaluating the stock of four different firms for possible inclusion in its fund holdings. As part oftheir analysis, Sante's managers have asked their junior analyst to estimate the investor-required rate of return oneach firm's shares using the CAPM and the following estimates: The rate of interest on short-term U.S. Treasurysecurities is currently 3.5 percent, and the expected return for the market portfolio is 9.5 percent. What should be theexpected rates of return for each investment?SecurityABCODBeta1.570.761.350.89a. The expected rate of return for security A, which has a beta of 1.57, is %. (Round to two decimal places.)

To calculate the expected rate of return using the Capital Asset Pricing Model (CAPM), we use the…

Answered: (Using the CAPM to find expected…

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

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The Jeffersons want to start investing $600 monthly to achieve their stated short- and long-term objectives. Which of the following monthly investments is most appropriate for them at this time and why? Provide two pros for the investment allocation you selected and one con for each of the investment allocations you did not select. $600 in a Roth IRA account for Jaylen, allocated as $300 in large cap domestic growth stocks, and $300 in an international growth fund $600 in a AAA-rated municipal bond fund $600 in a high yield, long-term bond fund $100 in a money market account, and $500 in a Roth IRA global balanced mutual fund
In a recent 5-year period, mutual fund manager Diana Sauros produced the following percentage rates of return for the Mesozoic Fund. Rates of return on the market index are given for comparison. Fund Market index a. 1 -1.2 -0.9 b. 2 +24.8 +16.0 a. Calculate (a) the average return on both the Fund and the index, and (b) the standard deviation of the returns on each. (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Did Ms. Sauros do better or worse than the market index on these measures? Average return Standard deviation Did Ms. Sauros do better or worse than the market index on these measures? 3 +40.7 +31.7 Mesozoic Fund Return Better 4 +11.1 +10.9 15.06 16.04 Market Portfolio Return 5 +0.3 -0.7 10.70 11.76
A hedge fund with $25 million of assets under management has a standard 2/20 fee structure and earns 14 percent this year. Assume that management fees are paid at the beginning of each year and performance fees are paid at the end of each year. Assume that the fund’s fee structure also contains a high-water mark provision. What is the management fee collected by the fund managers? What is the performance fee collected by the fund managers? What is the investor’s net return?
Neha is an analyst at a wealth management firm. One of her clients holds a $7,500 portfolio that consists of four stocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in the following table: Stock Investment Allocation Beta Standard Deviation Atteric Inc. 35% 0.750 0.53% Arthur Inc. 20% 1.400 0.57% Li Corp. 15% 1.300 0.60% Transfer Fuels Co. 30% 0.300 0.64% Neha calculated the portfolio’s beta as 0.828 and the portfolio’s expected return as 8.55%. Neha thinks it will be a good idea to reallocate the funds in her client’s portfolio. She recommends replacing Atteric Inc.’s shares with the same amount in additional shares of Transfer Fuels Co. The risk-free rate is 4.00%, and the market risk premium is 5.50%. 1. According to Neha’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change? 0.86% 0.67% 1.07% 0.99%…
Required information [The following information applies to the questions displayed below.) A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are: Expected Return Stock fund (S) 17% Bond fund (8) 11% The correlation between the fund returns is 0.15. Required: Solve numerically for the proportions of each asset and for the expected return and standard deviation of the optimal risky portfolio. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Portfolio invested in the stock Portfolio invested in the bond Expected return Standard deviation % % Standard Deviation 34% 25% % %
Mr. Ota is an analyst for a large pension fund and he has been assigned the task of evaluating two different external portfolio managers (K and C). He considers the following historical average return, standard deviation, and CAPM beta estimates for these two managers over the past five years: Actual Average Standard deviation Portfolio Beta Return Manager K Manager C 7.80% 10.05% 0.75 12.0% 15.50% 1.45 Additionally, Mr. Ota estimate for the risk premium for the market portfolio is 5.40% and the risk-free rate is currently 2.50%. a. For both Managers K and C, calculate the expected return using the CAPM. Express your answers to the nearest basis point (i.e., xX.XX%)
ques 19
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions. Specifically, Spice would like to know how fixed-income managers position portfolios to capitalize on their expectations of future interest rates. Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have semiannual coupon periods. Unless otherwise stated, all interest rate (yield curve) changes are parallel. The characteristics of these securities are shown in the following table. He also considers a nine-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%. Characteristics of Fixed-Rate Bond and Fixed-Rate Note Price Yield to maturity Time to maturity (years) Modified duration (years) Fixed-Rate Bond Fixed-Rate Note…
Please explain using Excel and show/explain formulas. Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio’s expected annual rate of return is 8%, and the annual standard deviation is 10%. Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor’s 500 index. The index has an expected return of 13%, and its standard deviation is 14%. a. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 3%. multiple choice Yes No b. Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +0.3. multiple choice Yes No
quiz 8-20
A mutual fund has $246 million dollars in assets, 27 million shares outstanding, and a total expense ratio of 0.5 percent. If during the past year the fund has bought and sold $105 million worth of assets, what is the fund's turnover rate? Enter answer in percents, accurate to two decimal places.
The Knowles/Armitage (KA) group at Merrill Lynch advises clients on how to create a diversified investment portfolio. One of the investment alternatives they make available to clients is the All World Fund composed of global stocks with good dividend yields. One of their clients is interested in a portfolio consisting of Investment in the All World Fund and a treasury bond fund. The expected percent return of an investment in the All World Fund is 9.80% with a standard deviation of 15.00%. The expected percent return of an investment in a treasury bond fund is 5.70% and the standard deviation is 4.00%. The covariance of an investment in the All World Fund with an investment in a treasury bond fund is -12. a. Which of the funds would be considered the more risky? Select your answer: Why? It has a - Select your answer- b. If KA recommends that the client invest 75% in the All World Fund and 25% in the treasury bond fund, what is the expected percent return and standard deviation for such…

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