Chapter 12, Problem 8QAP

a.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = ${\text{R}}_{1i}=0.10+1.5\text{F+}{\epsilon }_{1i}$

The return for each security, j, in the second market = ${\text{R}}_{2j}=0.10+0.5\text{F+}{\epsilon }_{2i}$

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

b.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = ${\text{R}}_{1i}=0.10+1.5\text{F+}{\epsilon }_{1i}$

The return for each security, j, in the second market = ${\text{R}}_{2j}=0.10+0.5\text{F+}{\epsilon }_{2i}$

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

c.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = ${\text{R}}_{1i}=0.10+1.5\text{F+}{\epsilon }_{1i}$

The return for each security, j, in the second market = ${\text{R}}_{2j}=0.10+0.5\text{F+}{\epsilon }_{2i}$

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

d.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = ${\text{R}}_{1i}=0.10+1.5\text{F+}{\epsilon }_{1i}$

The return for each security, j, in the second market = ${\text{R}}_{2j}=0.10+0.5\text{F+}{\epsilon }_{2i}$

To compute: The relationship between the correlation where the risk-averse person is indifferent.

Introduction: A risk-averse person is indifferent between the two markets when the risk of both markets is equal.