ESSENTIALS OF INVESTMENTS>LL<+CONNECT
11th Edition
ISBN: 9781264001026
Author: Bodie
Publisher: MCG
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Textbook Question
Chapter 5, Problem 16PS
For Problems 12-16, assume that you manage a risky portfolio with an expected
16. Your client (see previous problem) wonders whether to switch the 70% that is invested in your fund to the index portfolio. (LO 5−4)
a. Explain to your client the disadvantage of the switch.
b. Show your client the maximum fee you could character (as a percent of the investment in your fund. deducted a the end of the year) that would still leave him at least as well off investing in your fund as in the passive one. (Hint: The fee will lower the slope of your client’s CAL by reducing the expected return net of the fee.)
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Students have asked these similar questions
9.
Suppose you plan to form your overall investment portfolio in two steps:
STEP 1: Choose a portfolio of stocks with a zero position in the risk-free asset.
STEP 2: Allocate your money between the portfolio from Step 1 and the risk-free asset.
Suppose you can borrow and lend as much as you want at the risk-free rate in Step 2.
Let Erp be the expected return of the Step 1 portfolio.
Let Var(rp) be the variance of the return of the Step 1 portfolio. Let rf be the risk-free rate.
How will you form the Step 1 Portfolio?
Set the Step 1 portfolio to maximize Erp
SettheStep1portfoliotominimizeVar(rp)
Set the Step 1 portfolio to maximize Erp - Var(rp)
Set the Step 1 portfolio to maximize the ratio Erp/Var(rp)
Set the Step 1 portfolio to maximize the ratio (Erp- rf)/Var(rp)
None of the above.
You manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 36%. The T-bill rate is 6%. Your client's
degree of risk aversion is A = 3.1, assuming a utility function u =
E(r)
A02.
a. What proportion, y, of the total investment should be invested in your fund? (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
Investment proportion y
%
b. What are the expected value and standard deviation of the rate of return on your client's optimized portfolio? (Do not round
intermediate calculations. Round your answers to 2 decimal places.)
Expected return
%
Standard deviation
%
You manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 28%. The T-bill rate is 7%. Your client's
degree of risk aversion is A = 2.0, assuming a utility function u E(r)
=
A0².
a. What proportion, y, of the total investment should be invested in your fund? (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
Investment proportion y
Expected return
Standard deviation
-
%
b. What are the expected value and standard deviation of the rate of return on your client's optimized portfolio? (Do not round
intermediate calculations. Round your answers to 2 decimal places.)
%
%
Chapter 5 Solutions
ESSENTIALS OF INVESTMENTS>LL<+CONNECT
Ch. 5 - Prob. 1PSCh. 5 - The real interest rate approximately equals the...Ch. 5 - When estimating a Sharpe ratio, would it make...Ch. 5 - You’ve just decided upon your capital allocation...Ch. 5 - Prob. 5PSCh. 5 - The stock of Business Adventures sells for $40 a...Ch. 5 - Prob. 7PSCh. 5 - a. Suppose you forecast that the standard...Ch. 5 - Using the historical risk premiums as your guide,...Ch. 5 - What has been the historical average real rate of...
Ch. 5 - Consider a risky portfolio. The end-of-year cash...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - Prob. 17PSCh. 5 - You manage an equity fund with an expected risk...Ch. 5 - What is the reward-to--volatility (Sharpe) ratio...Ch. 5 - A portfolio of nondividend-paying stocks earned a...Ch. 5 - Which of the following statements about the...Ch. 5 - Which of the following statements reflects the...Ch. 5 - Use the following data in answering CFA Questions...Ch. 5 - Prob. 5CPCh. 5 - Lise the following data in answerifng CFA Question...Ch. 5 - Use the following scenario analysis for stocks X...Ch. 5 - Prob. 8CPCh. 5 - Use the following scenario analysis for stocks X...Ch. 5 - 10. Probabilities for three states of the economy...Ch. 5 - 11. An analyst estimates that a stock has the...Ch. 5 - Prob. 1WMCh. 5 - Prob. 2WMCh. 5 - Prob. 3WM
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