ESS. OF INVESTMENTS - ETEXT ACCESS CARD
11th Edition
ISBN: 9781265909055
Author: Bodie
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Videos
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.)
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
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
ESS. OF INVESTMENTS - ETEXT ACCESS CARD
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
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Consider the following information about a risky portfolio that you manage and a risk-free asset: E(rp) = 9%, Op = 24%, rf = 2%. Required: a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 8%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? b. What will be the standard deviation of the rate of return on her portfolio? c. Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 12%. Which client is more risk averse?arrow_forwardConsider the following information about a risky portfolio that you manage and a risk-free asset: E(rp) = 8%, op = 15%, rf = 2%. Required: a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 8%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? b. What will be the standard deviation of the rate of return on her portfolio? c. Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 12%. Which client is more risk averse? Complete this question by entering your answers in the tabs below. Required A Required B Required C Risky portfolio Risk-free asset Answer is complete but not entirely correct. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall…arrow_forward(corrected problem) NEW 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 CORRELATION COEFFICIENT 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?arrow_forward
- Suppose that you have access to two funds. Fund 1 has a ČAPM beta of 0.4, Fund 2 has a CAPM beta of 1.9. Fund 1 has an average return of 8.5% and Fund 2 has an average return of 10.5%. The riskless rate is 5% and the market risk premium is 7%. You would like to construct a Betting-against-Beta (BaB) strategy by levering up Fund 1 and delevering Fund 2 so that both have a beta of 1.75. Assume that you can borrow and lend at the riskless rate. What is the expected return on the zero-cost strategy long in levered Fund 1 and short in delevered Fund 2? A.8.00% B.4.39% C.2.93% D.10.25%arrow_forwardQUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6% whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using CAPM. 2) Compute the value of each investment based on your required rate of return and interpret the results comparing with the market values. 3) Which investment would you select? Explain why using appropriate financial jargon (language). 4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3? 5) AACSB Critical Thinking Questions: A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? (Textbook page: 198) B) What are the difficulties in using the PE ratio to value stock?…arrow_forwardPlease help me answer this question in Excel Form 2. The risk-free rate is 4%, and the required return on the market is 12%. b. A portfolio invests 40% in the asset in (a) and the rest in a market portfolio. What is the required return on this portfolio? Thanks :)arrow_forward
- Consider the following information about a risky portfolio that you manage and a risk-free asset: E(rp) = 16%, Op = 26%, rf = 4%. a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 6%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk- free asset? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Risky portfolio Risk-free asset b. What will be the standard deviation of the rate of return on her portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Standard deviation % % O First client O Second client % c. Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 12%. Which client is more risk averse?arrow_forwardYou manage a risky portfolio with an expected rate of return of 19% and a standard deviation of 32%. The T-bill rate is 7%. Your client’s degree of risk aversion is A = 3.3, assuming a utility function U = E(r) - ½Aσ². 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.) b. What is 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.)arrow_forwardD5)arrow_forward
- Consider the following information about a risky portfolio that you manage and a risk-free asset: E(rp) = 11%, op = 12%, rf =,2%. Required: a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 7%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? b. What will be the standard deviation of the rate of return on her portfolio? c. Another client wants the highest return possible subject to the constraint that you limit his standard deviation to be no more than 17%. Which client is more risk averse? Complete this question by entering your answers in the tabs below. Required A Required B Required C Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 7%. What proportion should she invest in the…arrow_forwardConsider an economy with a (net) risk-free return r1 = 0:1 and a market portfolio with normally distributed return, with ErM = 0:2 and 2M = 0:02. Suppose investor A has CARA preferences, with risk aversion coe¢ cient equal to 1 and an endowment of 10. a) Write down the maximization problem for the investor. b) Determine the amount invested in the risky portfolio and in the risk-free asset. c) Suppose another investor (B) has a coe¢ cient of absolute risk aversion equal to 2 (and the same endowment 10). Compute his optimal portfolio and compare it to that of investor A. Explain the di§erent results for investors A and B. d) Finally, consider Investor C with mean-variance preferences Ec V ar(c) (and endowment 10). Compute his optimal portfolio and compare it to that of investors A and B (as obtained in questions b and c). Compare your result with those obtained for investors A and B.arrow_forwardUsing the information provided in the pictures: Let’s assume, you want to construct a portfolio of risky and riskfreeassets. You wish to generate a 7% return for your complete portfolio E(rc). Using the Capital AllocationLine (CAL) equation - E(rc) = rf + y(E(Rp) - rf)a. Calculate the portion that you need to invest in risky assets and (b). in risk-free assets.c. Calculate the standard deviation of the portfolio.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
Chapter 8 Risk and Return; Author: Michael Nugent;https://www.youtube.com/watch?v=7n0ciQ54VAI;License: Standard Youtube License