You are testing the no-arbitrage principle of the APT, and you find a well-diversified portfolio with a β of 0.9 with respect to the market portfolio, M. You also have a risk-free asset, rf. Create a mimicking portfolio and show that it’s beta is also 0.9.

You are testing the no-arbitrage principle of the APT, and you find a well-diversified portfolio with a β of 0.9 with respect to the market portfolio, M. You also have a risk-free asset, rf. Create a mimicking portfolio and show that it’s beta is also 0.9.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 7MC: Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the...

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Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.

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. Write out the equation for the Capital Market Line(CML), and draw it on the graph. Interpret theplotted CML. Now add a set of indifference curvesand illustrate how an investor’s optimal portfoliois some combination of the risky portfolio and therisk-free asset. What is the composition of the riskyportfolio?
As a portfolio manager, assume the following information: The beta of your portfolio 1.2 Your performance is exactly on target with the SML data under condition 1 Assume the true SML data is given under condition 2. Condition 1 RFR Rm(proxy) Condition 2 0.04 0.1 0.05 0.12 Rm(true) How much does your performance differ from the true SML?
Which of the following statements about the Security Market Line are correct? I. The intercept point is the market rate of return. II. The slope of the line is beta. III. An investor should accept any return located above the SML line. IV. A beta of 0.0 indicates the risk-free rate of return
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The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 o(R) 0.4 0.45 [H]Z 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. Figure (1) shows an investor with a conservative investment behavior. In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. 0.15 Figure 2 0.2 0.25 o (R) 0.3 0.35 0.4 0.45
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You have a portfolio that is equally invested in Stock F with a beta of 1.15, Stock G with a beta of 1.52, and the risk-free asset. What is the beta of your portfolio? How do I solve this?
The SML implies that if you could find an investment with a negative beta, its expected return, E(k), would be: E(k) < 0 E(k) < k f 0 < E(k) < k f kF < E(k) < E(kM)