ESSEN.OF.INVESTMENTS+CONNECT
10th Edition
ISBN: 9781260361605
Author: Bodie
Publisher: MCG
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Textbook Question
Chapter 22, Problem 2CP
Your client says, “With the unrealized gains in my portfolio, I have almost saved enough money for my daughter to go to college in eight years, but educational costs keep going up.” Based on this statement alone, which one of the following appears to be least important to your client's investment policy?
a. Time horizon.
b.
c. Liquidity.
d. Taxes.
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An investment advisor currently has two types of investments available for clients: a conservative investment A that pays 8% per year and investment B of higher
risk that pays 14%. Clients may divide their investments between the two to achieve any total return desired between 8% and 14%. However, the higher the desired return,
the higher the risk. How should each client listed in the table invest to achieve the desired return?
Client 1 Client 2 Client 3 k
$21000 $40000 $31000 k,
Annual Return Desired $2460 $3860 $3740 k2
Total Investment
How much money should Client 1 invest in each account to achieved the desired return?
Amount in investment A:
Amount in investment B:
How much money should Client 2 invest in each account to achieved the desired return?
Amount in investment A:
Amount in investment B:
How much money should Client 3 invest in each account to achieved the desired return?
Amount in investment A:
Amount in investment B:
An investor is consider four different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below.
Economic Condition
Investment
Poor
Average
Good
Excellent
(S1)
(S2)
(S3)
(S4)
A
50
75
20
30
B
80
15
40
50
C
-100
300
-50
10
D
25
25
25
25
What decision would be made under minimax regret?
(Capital asset pricing model) Grace Corporation is considering the following investments. The current rate on Treasury bills is
2.5
percent and the expected return for the market is
9
percent.
Stock
Beta
K
1.06
G
1.28
B
0.78
U
0.93
(Click
on the icon
in order to copy its contents into a
spreadsheet.)
a. Using the CAPM, what rates of return should Grace require for each individual security?
b. How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to
4
percent and the market risk premium were to be only
6
percent?
c. Which market risk premium scenario (from part a or
b)
best fits a recessionary environment? A period of economic expansion? Explain your response.
Question content area bottom
Part 1
a. The expected rate of return for security K, which has a beta of
1.06,
is
enter your response here%.
(Round to two decimal places.)
Part 2
The expected rate…
Chapter 22 Solutions
ESSEN.OF.INVESTMENTS+CONNECT
Ch. 22 - Prob. 1PSCh. 22 - Prob. 1CPCh. 22 - Your client says, “With the unrealized gains in my...Ch. 22 - The aspect least likely to be included in the...Ch. 22 - Prob. 4CPCh. 22 - Prob. 5CPCh. 22 - Prob. 6CPCh. 22 - Which of the following statements reflects the...Ch. 22 - Prob. 8CPCh. 22 - Prob. 9CP
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