INVESTMENTS-CONNECT PLUS ACCESS
11th Edition
ISBN: 2810022611546
Author: Bodie
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 6, Problem 22PS
Summary Introduction
To calculate: The expected return considering Johnson’s risk constraint.
Introduction:
Capital Market Line (CML): It can be described as a graph which depicts the required return and risks of a portfolio related to a risk-free asset. It is also a group of risky assets which offers the best return- risk trading. The formula of CML is as follows:
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Consider the following performance data for a portfolio manager:
Benchmark
Portfolio
Index
Portfolio
Weight
Weight
Return
Return
Stocks
0.65
0.7
0.11
0.12
Bonds
0.3
0.25
0.07
0.08
Cash
0.05
0.05
0.03
0.025
a.Calculate the percentage return that can be attributed to the asset allocation decision.
b.Calculate the percentage return that can be attributed to the security selection decision.
Expected return and standard deviation. Use the following information to answer the questions:
a. What is the expected return of each asset?
b. What is the variance and the standard deviation of each asset?
c. What is the expected return of a portfolio with 12% in asset J, 52% in asset K, and 36% in asset L?
d. What is the portfolio's variance and standard deviation using the same asset weights from part (c)?
Hint: Make sure to round all intermediate
answers you will type.
a. What is the expected return of asset J?
(Round to four decimal places.)
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Return on
Asset J in
State of
Economy
Boom
Growth
Stagnant
Recession
Probability
of State
0.24
0.36
0.21
0.19
State
0.050
0.050
0.050
0.050
Return on
Asset K in
State
0.230
0.120
0.020
-0.060
Return on
Asset L in
State
0.250
0.190
0.065
- 0.190
The following portfolios are being considered for investment. During the period under consideration, RFR = 0.07.Portfolio Return Beta σiA 0.15 1.0 0.05B 0.20 1.5 0.10C 0.10 0.6 0.03D 0.17 1.1 0.06Market 0.13 1.0 0.04
a. Compute the Sharpe measure for each portfolio and the market portfolio.
b. Compute the Treynor measure for each portfolio and the market portfolio.
c. Rank the portfolios using each measure, explaining the cause for any differences you find in the rankings.
Chapter 6 Solutions
INVESTMENTS-CONNECT PLUS ACCESS
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
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
- The following portfolios are being considered for investment. During the period under consideration, RFR =0.07 Porfolio Return Beta P 0.15 1.00 0.05 Q 0.20 1.50 0.1 R 0.10 0.60 0.03 S 0.17 1.10 0.06 Market 0.13 1.00 0.04 Compute the Sharpe measure for each portfolio and the market portfolio Compute the Treynor measure for each portfolio and the market portfolio Rank the portfolios using each measure explaining the cause for any differences you find in the rankings.arrow_forward1. Relative to other theories portfolio formation, discuss the advantages of utilising the capital asset pricing model to analyse investment portfolios over earlier theories such Markowitz portfolio selection and mean variance. 2. As a portfolio management consultant you have been approached by a prospective investor who has investible funds of $2, 500, 000. He wants to know the investment awareness available to him which will give a rate of return with minimum risk? Clearly state the risks associated with the chosen investment. 3. Discuss the difference between active investment management and passive investment management.arrow_forwardCalculate the expected return from the following security using the CAPM Capital Asset Pricing Model: Standard Deviation of Security = 0.18 Standard Deviation of Market Portfolio = 0.10 Expected Return on Market Portfolio = 0.09 Correlation between possible Returns for the Security and the Market Portfolio = 0.70. Expected Risk Free Rate = 0.03arrow_forward
- a) Consider two assets with the following characteristics: Expected return of asset 1 = 0.15, Standard deviation of asset 1 = 0.10, portion in asset 1 = 0.5 Expected return of asset 2 = 0.20, Standard deviation of asset 2 = 0.20, Compute the expected return and standard deviation of portfolio if correlation coefficient (r1,2) = 0.40 and (r1,2)= -0.60 b) Why do most investors hold diversified portfolio?arrow_forwardReview the table below listing performance metrics for selected assets. The metrics are defined in the same way as in CAPM. Compute the CAPM alpha for the four assets (data attached as image).arrow_forwardHow would you characterize the correlations of returns of the two assets making up each of the two portfolios AB AND ACarrow_forward
- Consider a client with a 10% return objective. A financial adviser creates a policy statement for that client, identifies relevant financial securities that fit the risk return profile for this client, and drafts an optimal asset allocation using specialized optimization techniques. After one year, the financial adviser's recommendations produce a return of 10%. Question: Is this client satisfied with the performance of the portfolio?arrow_forwardReview the table below listing performance metrics for selected assets. The metrics are defined in the same way as in CAPM Return risk beta riskless asset 4% 0% 0 Market Portfolio 9% 24% 1 Fund A 8% 33% 0.4 Fund B 11% 30% 1.5arrow_forwardThe Ajax Company uses a portfolio approach to manage their research and development (R&D) projects. Ajax wants to keep a mix of projects to balance the expected return and risk profiles of their R&D activities. Consider a situation in which Ajax has six R&D projects as characterized in the table. Each project is given an expected rate of return and a risk assessment, which is a value between 1 and 10, where 1 is the least risky and 10 is the most risky. Ajax would like to visualize their current R&D projects to keep track of the overall risk and return of their R&D portfolio. Project Expected Rateof Return (%) Risk Estimate Capital Invested(Millions $) 1 12.6 6.8 6.4 2 14.8 6.2 45.8 3 9.2 4.2 9.2 4 6.1 6.2 17.2 5 21.4 8.2 34.2 6 7.5 3.2 14.8 The efficient frontier of R&D projects represents the set of projects that have the highest expected rate of return for a given level of risk. In other words, any project that has a smaller expected rate…arrow_forward
- The Ajax Company uses a portfolio approach to manage their research and development(R&D) projects. Ajax wants to keep a mix of projects to balance the expected return andrisk profiles of their R&D activities. Consider the situation where Ajax has six R&D projectsas characterized in the table. Each project is given an expected rate of return and a riskassessment, which is a value between 1 and 10 where 1 is the least risky and 10 is the mostrisky. Ajax would like to visualize their current R&D projects to keep track of the overallrisk and return of their R&D portfolio. a. Create a bubble chart where the expected rate of return is along the horizontal axis, therisk estimate is on the vertical axis, and the size of the bubbles represents the amountof capital invested. Format this chart for best presentation by adding axes labels andlabeling each bubble with the project number.b. The efficient frontier of R&D projects represents the set of projects that have the…arrow_forwardI need the answer quicklyarrow_forwardYou have been asked for your advice in selecting a portfolio of assets and have been supplied with the following data:. You have been told that you can create two portfolios-one consisting of assets A and B and the other consisting of assets A and C-by investing equal proportions (50%) in each of the two component assets. a. What is the average expected return, r, for each asset over the 3-year period? b. What is the standard deviation, s, for each asset's expected return? c. What is the average expected return, rp, for each of the portfolios? d. How would you characterize the correlations of returns of the two assets making up each of the portfolios identified in part c? e. What is the standard deviation of expected returns, Sp, for each portfolio? f. What would happen if you constructed a portfolio consisting of assets A, B, and C, equally weighted? Would this reduce risk or enhance return?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Chapter 8 Risk and Return; Author: Michael Nugent;https://www.youtube.com/watch?v=7n0ciQ54VAI;License: Standard Youtube License