GEN COMBO LOOSELEAF INVESTMENTS; CONNECT ACCESS CARD
11th Edition
ISBN: 9781260201550
Author: Bodie
Publisher: MCG
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Chapter 8, Problem 3CP
Summary Introduction
To determine: Based on the analysis and the information provided, we need to calculate the implied beta of the stock.
Introduction: Implied Beta or Implied Volatility, both tell us the different features associated with stock volatility.
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Assume that expected return of the stock A in your portfolio is 14.6%. The risk premium on the stocks of the same industry are 5.8%, the risk-free rate of return is 5.9% and the inflation rate was 2.7.
Calculate beta of thisstock using Capital Asset Pricing Model(CAPM)
Consider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%.
a) According to asset i’s return forecast, calculate αi.
(b) Calculate the optimal weight of combining asset i and the index portfolio M .
(c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .
Chapter 8 Solutions
GEN COMBO LOOSELEAF INVESTMENTS; CONNECT ACCESS CARD
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