You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index, yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%. i) Draw the CML and your funds' CAL on an expected return-standard deviation diagram. ii) What is the slope of the CML? iii) Characterize in one short paragraph the advantage of your fund over the passive fund.

You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index, yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%. i) Draw the CML and your funds' CAL on an expected return-standard deviation diagram. ii) What is the slope of the CML? iii) Characterize in one short paragraph the advantage of your fund over the passive fund.

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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Suppose that you use Arbitrage Pricing Theory (APT) to evaluate well-diversified portfolios. The three factor portfolios used in an APT model, portfolios 1, 2, and 3, have expected returns E(r1) = 5%, E(r2) = 3%, and E(r3) = 8%. Suppose further that the risk-free rate (λ0) is 2%. Calculate the total return on a well- diversified portfolio with its beta on the first factor, βA1 = 1.1, beta on the second factor, βA2 = .9, and beta on the third factor, βA3 = 1.2.
The following expected return and the standard deviation of current returns are known: Security (i) Expected Return Standard Deviation βi A 0.20 0.12 1.1 B 0.12 0.10 0.8T-Bills 0.05 0 0Market Portfolio 0.20 0.15 1 a) Determine the weights of a portfolio with a standard deviation of 7% created by combining T-Bill and the market portfolio. b) Determine which of A or B is over-valued or undervalued. c) How will you invest $1000 in riskless T-bills and the risky assets in the Market Portfolio to maintain a standard deviation of 10%. Pls show procedure, thanks
You are putting together a portfolio made up of four different stocks. However, you are considering two possible weightings per table below. What is the beta on each portfilio and which portfolio is riskier? a. -.05, 1.30. First portfolio is riskier b. .05, -1.30. Second portfolio is riskier c. 1.30, -.05. First portfolio is riskier d. -.05, 1.30. Second portfolio is riskier O O O a.. b.. C. . d.. Asset A B C Given Beta 2.5 1.0 0.5 -1.5 First Portfolio 10% 10% 40% 40% Second Portfolio 40% 40% 10% 10%
Please answer the
You are given the following information concerning three portfolios, the market portfolio, and the risk- free asset: Portfolio X Y Z Market Risk-free Rp 14.5% R-squared 13.5 9.1 10.7 5.4 op 36% 31 21 26 0 6p 1.60 1.30 .80 1.00 0 Assume that the correlation of returns on Portfolio Y to returns on the market is 72. What percentage of Portfolio Y's return is driven by the market? (Enter your answer as a decimal not a percentage. Round your answer to 4 decimal places.)
PLEASE SHOW USING EXCEL You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index, yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%. 1- Draw the CML and your funds’ CAL on an expected return–standard deviation diagram. 2- What is the slope of the CML? 3- Characterize in one short paragraph the advantage of your fund over the passive fund. 4- Your client ponders whether to switch the 70% that is invested in your fund to the passive portfolio. Explain to your client the disadvantage of the switch. 5- Show him the maximum fee you could charge (as a percentage of the investment in your fund, deducted at the end of the year) that would leave him at least as well off investing in your fund as in the passive one. (Hint: The fee will lower the slope of his CAL by reducing the expected…
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: Op 1.45 1.20 0.75 1.00 Portfolio: X Y Z Market Risk-free Rp 11.00% 10.00 8.10 10.40 5.20 Information ratio Op 33.00% 28.00 18.00 23.00 0 Assume that the tracking error of Portfolio X is 9.10 percent. What is the information ratio for Portfolio X? Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 4 decimal places. 02148 0
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: Portfolio Y Z Market Risk-free Rp 16.00% бр 32.00% 15.00 27.00 7.30 17.00 11.30 5.80 22.00 0 Bp 1.90 1.25 0.75 1.00 0 Assume that the tracking error of Portfolio X is 13.40 percent. What is the information ratio for Portfolio X? Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 4 decimal places. Information ratio
Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is foundto be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the requiredreturn on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B(B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to payreturns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standarddeviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also hasstandard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whetherasset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (??) =???????, where ??,?? are standard deviations of asset i and marketportfolio, ??? is the correlation between asset i and the market portfolio)Question 2. Foreign exchange marketsStatoil, the national…
Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratioof betaof A(A) tobeta of B(B). Thank you for your help.
(Portfolio VaR) Suppose there are two investments A and B. Either investment A or B has a 4.5% chance of a loss of $15 million, a 2% chance of a loss of $2 million, and a 93.5% change of a profit of $2 million. The outcomes of these two investments are independent of each other.
The expected return for asset A is 4.00% with a standard deviation of 9.00%, and the expected return for asset B is 6.75% with a standard deviation of 3.00%. Based on your knowledge of efficient portfolios, fill in the blanks in the following table with the appropriate answers. Proportion of Portfolio in Security A WA 1.00 0.75 0.50 0.25 0.00 Proportion of Portfolio in Security B WB 0.00 0.25 0.50 0.75 1.00 Expected Portfolio Return FP 4.00% 4.69% 6.06% 6.75% Standard Deviation Op Case I (PAB= -0.4) 6.5 4.1 2.5 3.0 Standard Deviation op Case II (PAB= 0.3) 9.0 5.2 3.6 3.0 The minimum risk portfolio allocation to asset A within the portfolio for case III is. Therefore, you are better off Standard Deviation op Case III (PAB=0.8) 9.0 7.4 5.8 ▼ 3.0

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