INVESTMENTS(LL)W/CONNECT
11th Edition
ISBN: 9781260433920
Author: Bodie
Publisher: McGraw-Hill Publishing Co.
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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:
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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.
ou have gathered the following information about two Assets: A and B
Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM) and its graphical representation, the security market line (SML). Relevant information is presented in the following table
ITEM RATE OF RETURN BETA
Risk-free asset 9% 0.0
Market portfolio 14% 1.0
Project A - 1.5
Project B - 0.75
Project C - 2.00
Project D - 0.0
Project E - -0.50
Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk.
Use your findings in part a to draw the security market line (required rate of return relative to nondiversifiable risk)
Discuss the relative nondiversifiable risk of projects A through E.
Assume that recent economic events have caused investors to become less risk-averse, causing the market return to decline to 12%. Calculate the new required returns fcor assets A through E and draw the new security market line on the same graph you drew for b.
Compare your findings…
Chapter 6 Solutions
INVESTMENTS(LL)W/CONNECT
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 are working as a portfolio associate and your manager assigned task to find out which investment option is feasible for existing portfolio. All of the investment options are riskier than market however still manager wants to optimize its risk in given investment options. Requirements: Calculate Average of each of the investment option. Calculate the Risk of each of the investment option. Calculate the Co-efficient of Variation of each investment option. Calculation of correlation each of the investment option. Calculate Beta of each of the investment option. Give your conclusion or recommendation which investment option is best for you in comparison to least risky.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
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Chapter 8 Risk and Return; Author: Michael Nugent;https://www.youtube.com/watch?v=7n0ciQ54VAI;License: Standard Youtube License