Essentials Of Investments
11th Edition
ISBN: 9781260316193
Author: Bodie
Publisher: MCG
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Chapter 6, Problem 14PS
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows:
Stock Expected Return Standard Deviation A 8 40% B 13 60
Correlation = −1
Could the equilibrium rfbe greater than 10%? (Hint: Can a particular stock portfolio be substituted for the risk-free asset?) (LO 6-3)
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Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, Rf. The characteristics of two of the stocks are as follows:
Stock
Expected ret
Standard dev
A
8%
40%
B
13%
60%
Correlation = -1
Could the equilibrium risk-free rate be greater than 10%?
(HINT: Can a particular stock portfolio be substituted for the risk-free rate?)
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rƒ. The characteristics of two of the stocks are as follows:
Stock
Expected Return
Standard Deviation
A
8%
55%
B
4%
45%
Correlation = −1
Required:
a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a “synthetic” risk-free asset?) (Round your answer to 2 decimal places.)
b. Could the equilibrium rƒ be greater than rate of return?
Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows:
Stock
Expected Return
Standard Deviation
A
11
%
7
%
B
17
11
Correlation = –1
Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Chapter 6 Solutions
Essentials Of Investments
Ch. 6.5 - Prob. 1EQCh. 6.5 - In light of each firm’s exposure to the financial...Ch. 6 - Prob. 1PSCh. 6 - When adding a risky asset to a portfolio of many...Ch. 6 - A portfolio’s expected return is 12%, its standard...Ch. 6 - An investor ponders various allocations to the...Ch. 6 - The standard deviation of the market-index...Ch. 6 - Suppose that the returns on the stock fund...Ch. 6 - Use the rate-of-return data for the stock and bond...Ch. 6 - Prob. 8PS
Ch. 6 - Prob. 9PSCh. 6 - Prob. 10PSCh. 6 - Prob. 11PSCh. 6 - Prob. 12PSCh. 6 - Stocks offer an expected rate of return of 10%...Ch. 6 - Suppose that many stocks are traded in the market...Ch. 6 - You can find a spreadsheet containing annual...Ch. 6 - Assume expected returns and standard deviations...Ch. 6 - Prob. 17PSCh. 6 - Prob. 18PSCh. 6 - A project has a 0.7 chance of doubling your...Ch. 6 - Investors expect the market rate of return this...Ch. 6 - The following figure shows plots of monthly rates...Ch. 6 - Prob. 22PSCh. 6 - Prob. 23PSCh. 6 - Prob. 25CCh. 6 - Prob. 1CPCh. 6 - Prob. 2CPCh. 6 - Abigail Grace has a $900,000 fully diversified...Ch. 6 - Prob. 4CPCh. 6 - Prob. 5CPCh. 6 - Prob. 6CPCh. 6 - Prob. 7CPCh. 6 - Prob. 1WMCh. 6 - Following the procedures in the previous question,...Ch. 6 - Prob. 3WMCh. 6 - Prob. 4WM
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