Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 5, Problem 4PS
You’ve just decided upon your capital allocation for the next year, when you realize that you’ve underestimated both the expected return and the standard deviation of your risky portfolio by a multiple of 1.05. Will you increase, decrease, or leave unchanged your allocation to risk-free T-bills? (LO 5-4)
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Students have asked these similar questions
Suppose the risk-free rate is 5%. The expected return and standard deviation of a risky asset are 10% and 20%, respectively.
a. What is the slope of the capital allocation line (CAL) constructed using the risk-free asset and the risky asset?
A. 0.30
B. 0.15
C. 0.25
D. 0.20
b. If an investor has a risk aversion coefficient of A=2, what is the optimal fraction of the money that she invests in the risky asset?
A. 62.5%
B. 42.5%
C. 30%
D. 20%
c. If an investor invest 25% of her money in the risky asset, which is the investor’s risk aversion coefficient?
a. 5
b. 1
c. 3
d. 4
A firm is considering a capital investment. The risk premium is 0.04, and it is considered to be constant through time. Riskless investmentsmay now be purchased to yield 0.06 (6%). If the project’s beta (β) is 1.5, what is the expected return for this investment?
The risk-free rate is currently
3.3%,
and the market return is
14.8%.
Assume you are considering the following investments:
Investment Beta
A 1.54
B 1.16
C 0.51
D 0.11
E 2.14
.
a. Which investment is most risky? Least risky?
b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments.
c. Find the security market line (SML), using your findings in part
b.
d. On the basis of your findings in part
c,
what relationship exists between risk and return? Explain.
Chapter 5 Solutions
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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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- Hi please solve this both partsarrow_forwardYou are considering a risky investment that you expect will either be worth 115,000 in 1 year, or 65,000, with probabilities of 0.65 and 0.35 for each outcome, respectively. You could invest in riskless T-bills at 0.058. If you invest in this risky investment, you would expect to earn a risk premium of 0.091 Given this information, what would you be willing to pay for this investment? 84,856 78,059 79,001 73,655 82,693arrow_forwardI need the answer as soon as possiblearrow_forward
- 9arrow_forwardGiven the current risk-free rate is 9% and the market return is 12%. TI Investment Beta A 0.65 1.12 C 0.87 1.19 E 0.56 Calculate the required rate of return for each of the investments by using the Capital Asset Pricing Model (CAPM). ii. i. If you invest an equal amount in each investment, what is the portfolio beta?arrow_forward1. (Without loss of generality assume that the expected/maximal exposures mentioned here correspond to a single time point in future, T.) Bank A uses for economic capital (EC) a measure equal to: 1.4 * EPE. Bank B, instead, uses the weighted average: 70% * EPE + 30% * ME. How small (or, indeed, how big?) does the ME (maximal exposure) need to be, relative to the EPE, for Bank A to end up putting aside (for this specific EC aspect) more EC than Bank B?arrow_forward
- The expected return for the investment is ??? The standard deviation is ??? While the expected return for the risk-free assets, Treasury Bills, is ??? The standard deviation is ???arrow_forwardIf the expected return on State Farm from the Capital Asset Pricing Model (the CAPM) is 0.20, and if the risk free rate of interest is 0.05, and if the expected return on the market portfolio is 0.20, then which of the following comes closest to State Farm's beta? A 0.50 B 1.50 C 0.00 D 1.00arrow_forwardThe discounted value of the Terminal Value (using the Perpetulty method) in your DCF analysis appears too low. The mistake could be: 1. You forgot to grow the last projected year's UFCF by one year before calculating the Terminal Value 2. Your estimated EVJEBITDA multiple for the Terminal Value is too low 3. Your Equity Risk Premium needs to be reduced 4. You should discount the Terminal Value over more years 5. You should subtract the risk-free rate while calculating the Cost of Equity to decrease the WACC Ⓒ1 and 2 1 and 3 2,4 and 5 14 andsarrow_forward
- a. Calculate the required rate of return for an asset that has a beta of 1.19, given a risk-free rate of 2.7% and a market return of 8.9%. b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to 12.1%, what is the required rate of return for the same asset?arrow_forward9. What return would you expect if the risk-free rate of return was 5 per cent, the beta risk is 1.5, and the historical risk premium has been 6 per cent? (Base you calculation on the capital asset pricing model.) A) 14% B) 13.5% C) 11% D) 16.5%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
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