You want to create a portfolio equally as risky as the market, and you have $5M to invest. Given theinformation below, what is your investment in the risk-free asset?AssetStock AStock BStock CRisk-free Asset$0.8M$0.7M$0.9M$1.1MInvestment$1M$2MBeta0.71.251.5

Calculate the weight of the risk-free asset:We know the weights of stock A and B since their…

Answered: You want to create a portfolio equally…

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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d) The return on the risk-free asset is 5%. You are given the following information: Security E(R) -% Firm A Firm B Firm C 10 14 16 Market portfolio 12 SD-% 31 ? 65 20 Correlation with Market portfolio ? .50 .35 1 Beta .85 1.40 ? 1 i) What is the correlation between security A and the market portfolio? ii) What is the standard deviation of security B? iii) What is the beta of security C? Give an interpretation of its value? iv) Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the stock of Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?
Part B 1. What must be the beta of a portfolio with E(rp) = 18%, if rƒ= 6% and E(rm) = 14%? 2. The market price of a security is $50. Its expected rate of return is 14%. The risk-free rate is 6%, and the market risk premium is 8.5%. What will be the market price of the security if its correla- tion coefficient with the market portfolio doubles (and all other variables remain unchanged)? Assume that the stock is expected to pay a constant dividend in perpetuity.
8
Risky asset P (an index fund) and risk-free asset F (T-Bill), form a complete portfolio C using P and F P: E(rP) = 15%, s(rP) = 22% F: rF = 7%, s(rF) = 0
Kelly has investments with the following characteristics in her portfolio: Investment in Beta Amount invested Stock Q 1.5 $80,000 Stock R 2.0 $50,000 Stock S 0.85 $70,000 Given the risk free rate of 2% and the market return of 7%, what is the expected rate of return of Kelly’s investment portfolio?
QUESTION 4 There are only 2 assets to invest in, both being risky. AAPL has an expected return of 10% and volatility of 15%. MSFT has an expected return of 12% and volatility of 18%. Which one of the following statements is correct? On the expected return-volatility space, the set of all feasible risky portfolios is a straight line. On the expected return-volatility space, the set of all feasible risky portfolios is a curve that does not go through any of the 2 risky assets. 100% invested in MSFT is an efficient portfolio. 100% invested in AAPL is an efficient portfolio.
Suppose you are considering investing some of your wealth in one of three investment portfolios: gold, food, or auto. Your broker provides you with the following table, which gives the probabilities of possible returns from each investment: Gold Food Auto Probability Return Probability Return Probability Return 0.2 15% 0.4 15% 0.2 20% 0.3 8.3% 0.6 5% 0.25 12% 0.2 10% 0.25 6% 0.3 5% 0.2 5% 0.1 0.10% Which investment should you choose to maximize your expected return: gold, food, or auto? If you are risk-averse and have to choose between the gold and the food investments, which should you choose? Why? Do I have to use standard deviation? Why?
Problem 1 You are given the following information about stock X and the market portfolio, M: Riskless Asset (f) Stock X Market Portfolio (M) E(r) 0.04 (4%) ? 0.10 σ 0.00 0.30 0.20 You are not given the expected return of stock X. The correlation of the returns on the stock X and the market portfolio is equal to 0.4. a) What is the beta (6) of stock X? b) Assuming the CAPM holds, what is the expected return on stock X? c) You have $1,000 to invest in some combination of the risk-free asset, stock X, and the market portfolio. You are thinking of investing $300 in the risk free asset, $400 in stock X, and $300 in the market portfolio. What is the overall expected return, standard deviation and beta of this portfolio?
Currently, you own a portfolio comprised of the following three securities. How much of the riskiest security should you sell and replace with risk-free securities if you want your portfolio beta to equal 90 percent of the market beta? Stock Value $13,640 15,980 23,260 E F Multiple Choice O $7,023.15 $7,811.29 O $8,666.67 O $7,753.51 Beta 1.13 1.48 .86 $8,318.50
3.1 Problem 3: You have access to two investment opportunities. Mutual Fund A, which promises 20% expected return with a variance of 0.36, and Mutual Fund B, which promises 15% expected return with a variance 0f 0.12. The covariance between the two is 0.084. Suppose that you seek to construct a portfolio with an expected return equal to 18%. What proportions of your wealth should you invest in A and B? What is the standard deviation of such portfolio?
5. You are considering investing in two securities, X and Y. The following data are available for the two securities: Security X Security Y Expected return 0.10 0.07 Standard deviation of returns 0.08 0.04 Beta 1.10 0.75
. The following questions are related to modern portfolio theory. • Assume there are only two stocks in the equity market. •The risk-free rate is 1.00%. Stock Return Volatility Correlation Matrix Y 0.7 1.0 X Y X 15.00% 20.00% 1.0 10.00% 15.00% 0.7 (a) Make an investment portfolio using the risky assets that has an expected return 12%. (b) Calculate the volatility of the portfolio in (a).

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You want to create a portfolio equally as risky as the market, and you have $5M to invest. Given the information below, what is your investment in the risk-free asset? Asset Stock A Stock B Stock C Risk-free Asset $0.8M $0.7M $0.9M $1.1M Investment $1M $2M Beta 0.7 1.25 1.5