INVESTMENTS-CONNECT PLUS ACCESS
11th Edition
ISBN: 2810022611546
Author: Bodie
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Question
Chapter 26, Problem 16PS
Summary Introduction
(a)
To calculate:
By using a misestimated beta of
Introduction:
Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.
Summary Introduction
(b)
To calculate:
By taking the expected market return value of
Introduction:
Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.
Summary Introduction
(c)
To calculate:
By taking the data of problem
Introduction:
Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.
Summary Introduction
(d)
To determine:
The reason for explaining the fact that the misestimated beta affects more to
Introduction:
Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose the SML has a risk-free rate of 5% and an expected market return of 15%. Now suppose that the SML shifts, changing slope, so that kRF is still 5% but kM is now 16%. What does this shift suggest about investors’ risk aversion? If the slope were to change downward, what would that suggest?
) You estimate that the expected return of your portfolio is 30%. The standard deviation
of the return is 25%.
a. The returns of your portfolio are normally distributed. What is the probability
of your portfolio suffering a loss greater than 20% (i.e., having a return that is
less than -20%)?
You may find the figure below helpful in answering the question (you can also
use Excel).
b. How would your answer to part a) change if the returns of your portfolio
exhibited negative skewness (relative to the normal distribution). You do not
need to do any calculations here - you just need to state whether it would be the
same, higher or lower. Please explain your answer for full credit.
68.26%
95.44%
99.74%
-30
-20
-10
+1g
+20
+30
+40
Rate of return (%)
E Focus
MacBook Pro
You are considering an investment in a portfolio P with the following expected returns in three different states of nature:
Recession
Steady
Expansion
Probability
0.20
0.65
0.15
Return on P
-20%
18%
32%
The risk-free rate is currently 5%, and the market portfolio M has an expected return of 15% and standard deviation of 25%, and its correlation with P is .5.
What is the portfolio P’s beta?
Chapter 26 Solutions
INVESTMENTS-CONNECT PLUS ACCESS
Knowledge Booster
Similar questions
- 1. Given the following summary statistics, Mean S.D. 1.235 0.997 Asset A 0.52 Asset B. 0.44 (a) If the correlation between the two financial series is 0.25. What are the optimal portfolio weights to minimize risk? (b) What are the expected return and standard deviation of the optimal port- folio? (c) Compute the 1% Value-at-Risk for the next 5 days (d) Compute the expected shortfallarrow_forwardYou are considering an investment in a portfolio P with the following expected returns in three different states of nature: Recession Steady Expansion Probability 0.20 0.65 0.15 Return on P -20% 18% 32% The risk-free rate is currently 5%, and the market portfolio M has an expected return of 15% and standard deviation of 25%, and its correlation with P is .5. Does portfolio P have a positive or negative alpha relative to its required return given its level of risk? Would you characterize P as a buy or sell, and why?arrow_forwardYou observe a portfolio for five years and determine that its average return is 11.1% and the standard deviation of its returns in 19.4%. Would a 30% loss next year be outside the 95% confidence interval for this portfolio? The low end of the 95% prediction interval is %. (Enter your response as a percent rounded to one decimal place.) O A. Yes, you can be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is less than - 30%. B. No, you cannot be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is greater than - 30%. C. Yes, you can be confident that the portfolio will not lose more than 30% of its value next year. This is because the low end of the prediction interval is greater than - 30%. O D. No, you cannot be confident that the portfolio will not lose more than 30% of its value next year. This is because the low…arrow_forward
- During a particular year, the T-bill rate was 6%, the market return was 14%, and a portfolio manager with beta of .5 realized a return of 10%.a. Evaluate the manager based on the portfolio alpha.b. Reconsider your answer to part (a) in view of the Black-Jensen-Scholes finding that the security market line is too flat. Now how do you assess the manager’s performance?arrow_forwardBased on the given annual returns, calculate the VAR for portfolios A and B to determine which is optimal. Additionally, assume that anything more than a 5% loss is unacceptable. Porfolio A Porfolio B Market T-bills A B Market RF 0.11 0.09 0.14 0.02 -0.04 -0.07 -0.06 0.03 0.13 0.11 0.10 0.03 0.07 0.09 0.05 0.04 0.19 0.16 0.18 0.03 0.09 0.07 0.10 0.03arrow_forwardYou are considering an investment in a portfolio P with the following expected returns in three different states of nature: Recession Steady Expansion Probability 0.20 0.65 0.15 Return on P -20% 18% 32% The risk-free rate is currently 5%, and the market portfolio M has an expected return of 15% and standard deviation of 25%, and its correlation with P is .5. Is P an efficient portfolio relative to the market?arrow_forward
- 1. Suppose the risk free rate is 3%. The expected and the standard deviation of the return of the market portfolio are 10% and 15%. Stock A has a standard deviation of return of 10%. The correlation coefficient between the returns of stock A and of the market is 0.6. A. What is the beta of stock A? B. According to CAPM, what is the expected return of stock A? C. If the actual expected return is 10%, is the stock over- or under-valued?arrow_forward. Assume that the Capital Asset Pricing Model holds. The market portfolio has an expected return of 5%. Stock A’s return has a market beta of 1.5, an expected value of 7% and a standard deviation of 10%. Stock B’s return has a market beta of 0.5 and a standard deviation of 20%. The correlation coefficient between stock A’s and stock B’s returns is 0.5. What is the risk-free rate? What is the expected return on stock B?arrow_forwardi need the answer quicklyarrow_forward
- Please solve only part a of this question in 2 hours and get a thumbs uparrow_forwardAssume CAPM holds. What is the correlation between an efficient portfolio and market portfolio? a. 1 b.-1 c.0 d. Not enough information Assume CAPM holds. The risk-free rate is 1% and the expected return on the portfolio is 5%. What is the expected return of a stock with a beta of 2? 70%arrow_forwardStock X has a beta of 0.6, while Stock Y has a beta of 1.4. Which of the following statements is CORRECT? a. If expected inflation increases but the market risk premium is unchanged, then the required return on both stocks will fall by the same amount. b. A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market. c. If expected inflation declines but the market risk premium is unchanged, then the required return on both stocks will decrease but the decrease will be greater for Stock Y. d. Stock Y must have a higher expected return and a higher standard deviation than Stock X. e. If the market risk premium declines but expected inflation is unchanged, the required return on both stocks will decrease, but the decrease will be greater for Stock Y.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning