Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 8, Problem 8.17P
Learning Goal 5
P8- 17 Total, nondiversifiable, and diversifiable risk David Talbot randomly selected securities from all those listed on the New York Stock Exchange for his portfolio. He began with a single security and added securities one by one until a total of 20 securities were held in the portfolio. After each security was added, David calculated the portfolio standard deviation, σ. The calculated values are shown in the following table
- a. Plot the data from the table above on a graph that has the number of sec unites on the x-axis and the portfolio standard deviation on the y-axis.
- b. Divide the total portfolio risk in the graph into its nondiversifiable and diversifiable risk components, and label each of these on the graph.
- c. Describe which of the two risk components is the relevant risk, and explain why it is relevant. How much of this risk exists in David Talbot’s portfolio?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
financial advisor evaluates four stocks for inclusion in an investor's portfolio. A orrelation matrix showing each stock's correlation with the other stocks is shown below Stock ALK CMN BTY DLE ALK 0.40 0.58 1.00 -0.25 BTY 0.40 1.00 0.16 -0.04 CMN -.25 .16 1.00 .37 DLE .58 .04 .37 1.00 f the goal is to reduce the investor's overall portfolio risk, which two stocks should the advisor recommend? a. ALK and DLE b. ALK and CMN c. BTY and DLE BTY and CM
PLEASE ANSWER ALL THE QUESTIONS
Question 1
Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items.
Question 2
Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML)
b) Superimpose the CAPM’s required return on the SML
c) Indicate which investments will plot on, above and below the SML?
d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph
Question 3
From the information generated in the previous two questions;
a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50-50 investment allocation in each investment alternative.
b) Compute the expected return of the portfolio thus formed.
c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?
You have formed a portfolio of five securities. The portfolio weights and betas of the individual securities are as follows:
Security wi βi
1 .55 1.5
2 .25 0.2
3 .15 -0.5
4 .30 0.5
5 0.8
What would be the beta of this portfolio?
Chapter 8 Solutions
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Ch. 8.1 - Prob. 1FOECh. 8.1 - What is risk in the context of financial decision...Ch. 8.1 - Prob. 8.2RQCh. 8.1 - Prob. 8.3RQCh. 8.2 - Explain how the range is used in scenario...Ch. 8.2 - Prob. 8.5RQCh. 8.2 - Prob. 8.6RQCh. 8.2 - What does the coefficient of variation reveal...Ch. 8.3 - What is an efficient portfolio? How can the return...Ch. 8.3 - Prob. 8.9RQ
Ch. 8.3 - How does international diversification enhance...Ch. 8.4 - Prob. 8.11RQCh. 8.4 - Prob. 8.12RQCh. 8.4 - Prob. 8.13RQCh. 8.4 - What impact would the following changes have on...Ch. 8 - Prob. 1ORCh. 8 - Prob. 8.1STPCh. 8 - Prob. 8.2STPCh. 8 - Prob. 8.1WUECh. 8 - Prob. 8.2WUECh. 8 - Prob. 8.3WUECh. 8 - Prob. 8.4WUECh. 8 - Prob. 8.5WUECh. 8 - Prob. 8.6WUECh. 8 - Prob. 8.1PCh. 8 - Prob. 8.2PCh. 8 - Prob. 8.3PCh. 8 - Prob. 8.4PCh. 8 - Prob. 8.5PCh. 8 - Learning Goal 2 P8-6 Bar charts and risk Swans...Ch. 8 - Prob. 8.7PCh. 8 - Prob. 8.8PCh. 8 - Prob. 8.9PCh. 8 - Prob. 8.10PCh. 8 - Prob. 8.11PCh. 8 - Prob. 8.12PCh. 8 - Prob. 8.13PCh. 8 - Prob. 8.14PCh. 8 - Learning Goal 4 P8- 15 Correlation, risk, and...Ch. 8 - Prob. 8.16PCh. 8 - Learning Goal 5 P8- 17 Total, nondiversifiable,...Ch. 8 - Prob. 8.18PCh. 8 - Prob. 8.19PCh. 8 - Prob. 8.20PCh. 8 - Prob. 8.21PCh. 8 - Prob. 8.22PCh. 8 - Prob. 8.23PCh. 8 - Prob. 8.24PCh. 8 - Prob. 8.25PCh. 8 - Prob. 8.26PCh. 8 - Prob. 8.27PCh. 8 - Learning Goal 6 P8- 28 Security market line (SML)...Ch. 8 - Prob. 8.29PCh. 8 - Prob. 8.30PCh. 8 - Prob. 8.31PCh. 8 - Prob. 1SE
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
- Q .1 What is the Sharpe measure of:i. Portfolio A?ii. Portfolio C?iii. Portfolio E? Q.2 What is the Treynor measure of:i. Portfolio A?ii. Portfolio C?iii. Portfolio E?arrow_forwardShow detailed steps to solve the following question. Consider a portfolio comprised of three securities in the following proportions and with the indicated security beta. a.) What is the portfolios beta? b.) Wht is the portfolios expected return?arrow_forwardConsider 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 = -0.14arrow_forward
- Jason Jackson is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. He is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the following data: LOADING... . a. Calculate the betas for portfolios A and B. b. Compare the risk of each portfolio to the market as well as to each other. Which portfolio is more risky? Question content area bottom Part 1 Data table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Portfolio Weights Asset Asset Beta Portfolio A Portfolio B 1 1.35 17% 29% 2 0.69 26% 8% 3 1.24 10% 22% 4 1.06 11% 20% 5 0.87 36% 21% Total 100% 100% a. The beta of portfolio A is enter your response here. (Round to three…arrow_forwardQn4: Assume a two-stock portfolio created with $50,000 is invested in both HT and Collections. The expected returns are given below: Calculate the portfolio's return for each state of economy and fill them in the last column, under "Portfolio" (Hint: The portfolio's expected return is a weighted average of the returns of the portfolio's component assets). Calculate the portfolio's expected return (Hint: You have to incorporate the probability distribution of each state of economy). Calculate the portfolio's standard deviation. Economy Recession Below average Average Above average Boom Prob. HT 0.1 -27.0% 0.2 -7.0% 0.4 15.0% 0.2 30.0% 0.1 45.0% Coll 27.0% 13.0% 0.0% -11.0% -21.0% Portfolioarrow_forward5. The universe of available securities includes two risky stock funds, A and B, and T-bills. The data for the universe are as follows: A B T-bills Expected Return 10% 30% 5 Standard Deviation 20% 60% 0 The correlation coefficient between funds A and B is -0.2. a. Compute the covariance between the funds. b. Find the optimal risky portfolio, P, and its expected return and standard deviation. c. Find the slope of the CAL supported by T-bills and portfolio P. d. How much will an investor with A = 5 invest in funds A and B and in T-bills?arrow_forward
- Jm. 157.arrow_forwardSuppose you manage an equity fund with the following securities. Use the following data to help build an active portfolio. Input Data Vogt Industries Isher Corporation Hedrock, Incorporated Alpha 0.012 0.006 0.016 Beta 0.277 1.015 1.630 Standard Deviation 0.156 0.168 0.181 Residual Standard Deviation 0.117 0.048 0.113 Information Ratio 0.1026 0.1250 0.1416 Alpha/Residual Variance 0.877 2.604 1.253 Market Data S&P 500 Treasury Bills Expected Raturn 12.00% 2.50% Standard Deviation 20.00% 0.00% Required: Using the information in the table above, please first calculate the initial weight of each stock in an active portfolio, using the Treynor Black approach. Then adjust each weight for beta. (Use cells A5 to D14 from the given information to complete this question.) Treynor-Black Model Vogt Industries Isher Corporation Hedrock, Incorporated…arrow_forwardSuppose you manage an equity fund with the following securities. Use the following data to calculate the information ratio of each stock. Input Data Vogt Industries Isher Corporation Hedrock, Incorporated Alpha 0.012 0.006 0.016 Beta 0.277 1.015 1.630 Standard Deviation 0.156 0.168 0.181 Residual Standard Deviation 0.117 0.048 0.113 Required: Using the information in the table above, please calculate the information ratio for each stock. (Use cells A5 to D8 from the given information to complete this question.) Vogt Industries Isher Corporation Hedrock, Incorporated Information Ratioarrow_forward
- 7. The following data are available to you as portfolio manager: Security Estimated return (%) Beta A 40 3.0 B 35 2.5 30 1.0 D 17.5 1.8 E 20.0 1.5 Market Index 25 2.0 Govemment Security 17 a) In terms of the security market line, which of the securities listed above are underpriced? b) Assuming that a portfolio is constructed using equal proportions of the five securities listed above, calculate the expected retum and risk of such a portfolio.arrow_forwardWhich of the two securities are the best? By using probability estimates, below is the computation of ff. statistics: Statistic Security A Security B Expected return Standard deviation 12% 20% 8% 10% Requirement Calculate the coefficient of variation for each security Explain why the standard deviation and coefficient of variation give different ranking of risk. Which method is superior and why?arrow_forwardWhat is the beta of a portfolio comprised of the following securities? Stock Amount Invested Security Beta- 0.86 1.76 1.35 A B C $3600 $ 2800 $ 9000 Beta of portfolio to 2 decimal places is Numeric Responsearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Chapter 8 Risk and Return; Author: Michael Nugent;https://www.youtube.com/watch?v=7n0ciQ54VAI;License: Standard Youtube License