Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 7, Problem 18PS
Portfolio risk Your eccentric Aunt Claudia has left you $50,000 in BP shares plus $50,000 cash. Unfortunately her will requires that the BP stock not be sold for one year and the $50,000 cash must be entirety invested in one of the stocks shown in Table 7.9. What is the safest attainable portfolio under these restrictions?
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You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible
investments is given below:
Asset
Stock A
Stock B
Stock C
Risk-free asset
Investment,
$ 141,000
$ 139,000
Beta
.86
1.31
1.46
How much will you invest in Stock C? How much will you invest in the risk-free asset?
Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.
Investment in Stock C
Investment in risk-free asset
You want to create a portfolio equally as risky as the market, and you have $500,000 to
invest. Information about the possible investments is given below:
Investment
$137,000
$143,000
Asset
Stock A
Stock B
Stock C
Risk-free asset
Beta
.82
1.27
1.42
How much will you invest in Stock C? How much will you invest in the risk-free
asset? (Do not round intermediate calculations and round your answers to 2 decimal
places, e.g., 32.16.)
Investment in Stock C
Investment in risk-free asset
You want to create a portfolio equally as risky as the market, and you have $500,000 to
invest. Information about the possible investments is given below:
Asset
Stock A
Stock B
Stock C
Risk-free asset
Investment
$135,000
$145,000
Beta
.80
1.25
1.40
How much will you invest in Stock C?
How much will you invest in the risk-free asset?
Investment in Stock C
Investment in risk-free asset
(Do not round intermediate calculations and round your answers to 2 decimal places,
e.g., 32.16.)
Chapter 7 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Portfolio risk True or false? a. Investors prefer...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Prob. 9PSCh. 7 - Prob. 10PS
Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Prob. 12PSCh. 7 - Prob. 13PSCh. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.9 shows standard deviations...Ch. 7 - Portfolio risk Your eccentric Aunt Claudia has...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio risk You can form a portfolio of two...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...Ch. 7 - Beta Calculate the beta of each of the stocks in...
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- image question solutionarrow_forwardNikularrow_forwardYou want to create a portfolio equally as risky as the market, and you have $250,000 to invest. Given this information, fill in the three missing pieces of information in the following table. Show your calculations: Investment Betal 0.90 Asset Stock A $50,000 Stock B $70,000 Stock C Risk-Free Asset 1.25 1.60arrow_forward
- Nonearrow_forwardYou want to create a portfolio equally as risky as the market, and you have $5M to invest. Given the information below, what is your investment in the risk-free asset? Asset Stock A Stock B Stock C Risk-free Asset $0.8M $0.7M $0.9M $1.1M Investment $1M $2M Beta 0.7 1.25 1.5arrow_forwardYou hold a diversified $100, 000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta is 1.12. You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.50. What will the portfolio's new beta be? Do not round your intermediate calculations. a. 1.500 b. 1.310 c 1.195 d. 1.165 e. 1.150 .arrow_forward
- Anna holds a portfolio comprising the following 3 stocks: X, Y and Z. Amount $'000 Beta 2,000 1.3 1,000 500 (a) (b) (c) Investment Security X Security Y Security Z Determine the expected return of security X. Calculate the return of Anna's portfolio. Calculate the beta of Anna's portfolio. 1.0 0 Expected Return 10% 2% (d) To reduce the systematic risk of the portfolio, Anna is considering 3 securities to add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and Security C has a beta of -0.3. Discuss which security will be most effective in reducing the portfolio's systematic risk? How would portfolio expected return change (higher or lower) if you add this security?arrow_forwardThis example is part of "Hedged Portfolios" to minimize risk. Assume you have $7000 to invest; A stock is trading at $100.00. A call option that expires in one year with a strike price of $100.00 is trading at $8.00. How much is your portfolio's 1-year return if you invest in "Only Options" and the stock price after one year is $54.00? Enter your answer in the following format: + or - 0.1234 Hint: The Answer is between -0.89 and -1.08arrow_forwardSuppose an investor wants to invest $X in a one-month portfolio consisting of ONE risk-free asset and ONE ACTUAL (not synthetic) risky asset. Which of the following statement(s) is (are) FALSE? The investor can invest between 0% and 100% of her funds in the risk free asset The investor can invest 100% of her funds in the risky asset The investor can "short" the risk free asset and use the funds to invest in the risky asset The investor can invest 100% of her funds in the risk free asset The investor can "short" the risky asset and use the funds to invest in the risk-free assetarrow_forward
- Don't provide answers in image formatarrow_forwardThis example is part of "Hedged Portfolios" to minimize risk. Assume you have $9000 to invest; A stock is trading at $90.00. A call option that expires in one year with a strike price of $90.00 is trading at $10.00. What is your portfolio's 1-year return if you invest in "Only Stocks" and the the stock price after one year is $48.00? Enter your answer in the following format: + or - 0.1234 Hint: Answer is between -0.4212 and -0.5042 ___________? ANSWER IN TYPINGarrow_forwardYou hold a diversified portfolio consisting of a $15,082 invested in each of 5 different common stocks. The portfolio beta is equal to 1.13. You have decided to sell one of your stocks that has a beta equal to 0.8 for $15,082. You plan to use the proceeds to purchase another stock that has a beta equal to 1.9. What will be the beta of the new portfolio? O 1.45 O 1.75 O 1.35 O 1.65 O 1.55 27arrow_forward
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