Essentials Of Investments
11th Edition
ISBN: 9781260316193
Author: Bodie
Publisher: MCG
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Chapter 7, Problem 17PS
If the simple
Explain. Consider each situation independently.
17. Portfolio Expected Return Beta Risk-tree 10% 0 Market 16 1.5 (LO 7-1)
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Assuming your utility function U = E(r) - Ao². Consider the investments shown in
the table. If your risk aversion coefficient is -2, which investment would you choose?
Investment E[r]
#1
#2
#3
#4
#2
#3
#4
#1
12%
15%
15%
24%
σ
40%
40%
30%
40%
choose which one ?
3.Assume CAPM holds. What is the correlation between an efficient portfolio and the market portfolio?a.1b.-1c.0d.Not enough information
Consider the following information for four portfolios, the market, and the risk-free rate (RFR):
Portfolio
Return
Beta
SD
A1
0.15
1.25
0.182
A2
0.1
0.9
0.223
A3
0.12
1.1
0.138
A4
0.08
0.8
0.125
Market
0.11
1
0.2
RFR
0.03
0
0
Refer to Exhibit 18.6. Calculate the Jensen alpha Measure for each portfolio.
a. A1 = 0.014, A2 = -0.002, A3 = 0.002, A4 = -0.02
b. A1 = 0.002, A2 = -0.02, A3 = 0.002, A4 = -0.014
c. A1 = 0.02, A2 = -0.002, A3 = 0.002, A4 = -0.014
d. A1 = 0.03, A2 = -0.002, A3 = 0.02, A4 = -0.14
e. A1 = 0.02, A2 = -0.002, A3 = 0.02, A4 = -0.14
Chapter 7 Solutions
Essentials Of Investments
Ch. 7 - Prob. 1PSCh. 7 - Consider the statement: “If we can identify a...Ch. 7 - Are the following true or false? Explain. (LO 7-5)...Ch. 7 - Here are data on two companies. The T-bill rate is...Ch. 7 - Characterize each company in the previous problem...Ch. 7 - What is the expected rate of return for a stock...Ch. 7 - Kaskin, Inc., stock has a beta of 1.2 and Quinn,...Ch. 7 - What must be the beta of a portfolio with E(rf)) =...Ch. 7 - The market price of a security is $40. Its...Ch. 7 - You arc a consultant to a large manufacturing...
Ch. 7 - Consider the following table, which gives a...Ch. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Two investment advisers are comparing performance....Ch. 7 - Suppose the yield on short-term government...Ch. 7 - Based on current dividend yields and expected...Ch. 7 - Consider the following data for a single index...Ch. 7 - Assume both portfolios A and B are well...Ch. 7 - Prob. 29PSCh. 7 - Prob. 30PSCh. 7 - Et
Ch. 7 - Suppose two factors are identified for the U.S....Ch. 7 - Suppose there are two independent economic...Ch. 7 - As a finance intern at Pork Products, Jennifer...Ch. 7 - Suppose the market can be described by the...Ch. 7 - Which of the following statements about the...Ch. 7 - Kay, a portfolio n1anacr at Collins Asset...Ch. 7 - Prob. 3CPCh. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CPCh. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CPCh. 7 - 12. A zero-investment, well-diversified portfolio...Ch. 7 - 13. An investor takes as large a position as...Ch. 7 - In contrast to the capital asset pricing model,...Ch. 7 - Prob. 1WMCh. 7 - Prob. 2WMCh. 7 - Prob. 3WMCh. 7 - a. Which of the stocks would you classify as...
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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
- Consider the following information: Portfolio Expected Return Standard Deviation Risk-free 7% 0% Market 11.6 28 A 10.0 17 Required: a. Calculate the Sharpe ratios for the market portfolio and portfolio A. (Round your answers to 2 decimal places.) b. If the simple CAPM is valid, is the above situation possible?arrow_forward4arrow_forward4. Suppose that there are 2 assets with ri 012 = 0.005. = 0.20, 01 = = 0.40, 2 = 0.10, 02 = 0.25 and (a) If ro = 0.02, what are the market portfolio return and variance? What are the corre- sponding weights (i.e. how much to invest in asset 1, asset 2, and the risk-free asset to get the market portfolio)? Answer. (b) If ro 0.05, what are the market portfolio return and variance? What are the corre- sponding weights? Answer.arrow_forward
- Question 2: If the simple CAPM is valid, which of the following situations are possible? Consider each situation separately. a) b) c) d) f) Portfolio A B Portfolio A B Expected Return 20 25 Expected Return 30 40 Portfolio Risk-free 7 Market A Portfolio Risk-free Market A Expected Return 16 14 Portfolio Risk-free 10 Market 18 A 20 Expected Return Expected Return 7 17 13 Portfolio Risk-free 4 Market A Expected Return 17 13 Beta 1.4 1.2 Standard Deviation 35 25 Standard Deviation 0 30 15 Standard Deviation 0 24 22 Beta 0 1.5 2 Standard Deviation 0 31 16arrow_forwardExample of CAPM Equation: Case Risk free Rate (Rf) Market return (Km) Beta (b) Required Return A 5% 8% 1.30 ? B 8% 13% 0.90 ? C 10% 15% -0.20% ? D ? 12% 1.0 12% E 6% ? 0.60 9% F 5% 16% ? 10% Required: Using CAPM equation, compute the missing value (?)arrow_forwardQUESTIONS AND PROBLEMS 1. Assume that the following two-index model describes returns: R=a+b+b212 +e; Assume that the following three portfolios are observed. Portfolio ABC Expected Return 12.0 13.4 12.0 bil b₁₂ 0.5 1 0.2 3 -0.5 3 Find the equation of the plane that must describe equilibrium returns. 111 illustrate the arbitrage opportunities thatarrow_forward
- Refer to the graph below, what is the beta of portfolio X under CAPM? E(r) A 0.14 0.10 0.06 N Beta of portfolio X = place) M X o(r) (to the nearest 1 decimalarrow_forwardUse the following CAPM equation for a portfolio to answer the questions that follow:E(RP) = RF + βP (RM – RF) = 1 + 0.8 (5 – 1) = 4.2% a) Is the portfolio defensive or aggressive. Why? b) If the actual portfolio return is 6%, what is the portfolio’s alpha?arrow_forwardVijayarrow_forward
- Question 2: If the simple CAPM is valid, which of the following situations are possible? Consider each situation separately. a) b) c) d) e) f) Portfolio A B Portfolio A B Expected Return 20 25 Expected Return 30 40 Portfolio Risk-free 7 Market A Expected Return 16 14 Portfolio Risk-free 10 Market 18 A 20 Expected Return Portfolio Risk-free 7 Market A Expected Return 17 13 Portfolio Risk-free 4 Market A Expected Return 17 13 Beta 1.4 1.2 Standard Deviation 35 25 Standard Deviation 0 30 15 Standard Deviation 0 24 22 Beta 0 1.5 2 Standard Deviation 0 31 16arrow_forwardWhat is the correlation coefficient between returns on any efficient portfolio and returns on the market portfolio in CAPM? 0.5 -0.5 -1 1 Oarrow_forwardBaghibenarrow_forward
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