EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 6, Problem 18PS
a
Summary Introduction
Adequate information:
Expected rate of
Standard deviation of the risky asset=28%
Complete portfolio’s standard deviation will not increase beyond 18%.
T-bill rate is 8%
Client decides to invest in your portfolio in the proportion Y
Overall portfolio’s expected rate of return =16%
To compute: The proportion of Y
Introduction:
Risky Portfolio: When there is a chance of non-accomplishment of financial objectives of an investment in a unit or combination of assets, it is termed as risky portfolio. A higher risk always carries higher return.
b
Summary Introduction
Adequate information:
Expected
Standard deviation of the risky asset=28%
T-bill rate is 8%
Client decides to invest in your portfolio in the proportion Y
Overall portfolio’s expected rate of return =16%
Complete portfolio’s standard deviation will not increase beyond 18%.
To compute: The expected rate of return on the complete portfolio.
Introduction:
Expected return of the portfolio: It is also called as weighted average expected return. So, it is must to consider both the weights and the expected return of both stocks.
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Consider 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…
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…
You manage a risky portfolio with an expected rate of return of 10% and a standard deviation of 34%. The T-bill rate is 4%.
Suppose that your client prefers to invest in your fund a proportion y that maximizes the expected return on the complete portfolio
subject to the constraint that the complete portfolio's standard deviation will not exceed 10%.
Required:
a. What is the investment proportion, y?
b. What is the expected rate of return on the complete portfolio?
Chapter 6 Solutions
EBK INVESTMENTS
Ch. 6.A - Prob. 1PCh. 6.A - Prob. 2PCh. 6 - Prob. 1PSCh. 6 - Prob. 2PSCh. 6 - Prob. 3PSCh. 6 - Prob. 4PSCh. 6 - Prob. 5PSCh. 6 - Prob. 6PSCh. 6 - Prob. 7PSCh. 6 - Prob. 8PS
Ch. 6 - Prob. 9PSCh. 6 - Prob. 10PSCh. 6 - Prob. 11PSCh. 6 - Prob. 12PSCh. 6 - Prob. 13PSCh. 6 - Prob. 14PSCh. 6 - Prob. 15PSCh. 6 - Prob. 16PSCh. 6 - Prob. 17PSCh. 6 - Prob. 18PSCh. 6 - Prob. 19PSCh. 6 - Prob. 20PSCh. 6 - Prob. 21PSCh. 6 - Prob. 22PSCh. 6 - Prob. 23PSCh. 6 - Prob. 24PSCh. 6 - Prob. 25PSCh. 6 - Prob. 26PSCh. 6 - Prob. 27PSCh. 6 - Prob. 28PSCh. 6 - Prob. 29PSCh. 6 - Prob. 1CPCh. 6 - Prob. 2CPCh. 6 - Prob. 3CPCh. 6 - Prob. 4CPCh. 6 - Prob. 5CPCh. 6 - Prob. 6CPCh. 6 - Prob. 7CPCh. 6 - Prob. 8CPCh. 6 - Prob. 9CP
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- You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%. Your client’s degree of risk aversion is A = 3.5.a. What proportion, y, of the total investment should be invested in your fund?b. What is the expected value and standard deviation of the rate of return on your client’s optimized portfolio?arrow_forwardThe expected return of a portfolio that is totally invested in the risk free asset is caclculated as: E(R) = WA * E(RA) Wf * E(RB) = 0 * 0.16 1.0 * 0.08 = 0 0.08 = 0.08 or 8% Therefore the expected return of a portfolio with risk free asset is 8% There is no standard deviation for the risk free asset. Please full Explainarrow_forwardConsider the following information about a risky portfolio that youmanage, and a risk-free asset: E(rP ) = 11%, σP = 15%, rf = 5%.a) Your client wants to invest a proportion of her total investment budget in your riskyfund to provide an expected rate of return on her overall or complete portfolio equal to8%. What proportion should she invest in the risky portfolio, P, and what proportionin 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 limithis standard deviation to be no more than 12%. Which client is more risk averse?arrow_forward
- 2. Please help and explainarrow_forward9. 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.arrow_forwardYou 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 %arrow_forward
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