Connect 1-Semester Access Card for Essentials of Investments
10th Edition
ISBN: 9781259354977
Author: Zvi Bodie, Alan Marcus, Alex Kane
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 5, Problem 4CP
Use the following data in answering CFA Questions 4-6.
Investment Expected Return,E®Standard Deviation, 6
10. 120.30
20. 10.50
30. 210.16
4. 0.24 0.21
Suppose investor “satisfaction” with a portfolio increases with expected return and decreases with variance according to the following “utility” formula: U = E® − ½ A2where A denotes the investor’s risk aversion.
4. Based on the formula for investor satisfaction or “utility,” which investment would you select if you were risk averse with A = 4? (LO 54)
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Supposing the return from an investment has the following probability distribution
Return Probability
R (%)
8 0.2
10 0.2
12 0.5
14 0.1
Required:
What is the expected return of the investment?
What is the risk as measured by the standard deviation of expected returns?
On the basis of the utility formula below, which investment would you select if you were risk averse with A = 4?
Investment
Expected return E(r)
Standard deviation
σ
1
0.12
0.30
2
0.15
0.50
3
0.21
0.16
4
0.24
0.21
Portfolios A and B are both well-diversified. The risk-free rate is 8%. The return for the market is 10%.
Portfolio A has an expected return of 15% and beta of 1.1. Portfolio B has an expected return of 9% and beta
of 0.20. Portfolio A's variance is 9%, whilst Portfolio B's variance is 5.5%.
Calculate for Portfolio A and Portfolio B the following:
1. Sharpe's Measure,
2. Treynor's Measure,
3. Jensen's Measure.
Which is the better portfolio according to each measure?
Chapter 5 Solutions
Connect 1-Semester Access Card for Essentials of Investments
Ch. 5 - Prob. 1PSCh. 5 - Prob. 2PSCh. 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 - Download the annual returns on the combined...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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- a) Discuss the difference between a price-weighted index and a value-weighted index. Give one example for the price-weighted index and one example for the value-weighted index and discuss any problems/advantages associated with the specific indices. b) We assume that investors use mean-variance utility: U = E(r) – 0.5 × Ao², where E(r) is the expected return, A is the risk aversion coefficient and o? is the variance of returns. Given that the optimal proportion of the risky asset in the complete port- folio is given by the equation y* = E , where r; is the risk-free rate, E(rp) is the expected returm of the risky portfolio, o, is variance of returns, and A is the risk aversion coefficient. For each of the variables on the right side of the equation, discuss the impact of the variable's effect on y* and why the nature of the relationship makes sense intuitively. Assume the investor is risk averse. Aoarrow_forwardWhat are the (a) expected return, (b) standard deviation, and (c) coefficient of variation for an investment with the following probability distribution? Probability Payoff 0.2 19.0% 0.7 9.0 0.1 4.0arrow_forwardcan you evaluate the portfolio performance ?arrow_forward
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