Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
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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

Chapter 8, Problem 8.17P, Learning Goal 5 P8- 17 Total, nondiversifiable, and diversifiable risk David Talbot randomly

  1. 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.
  2. b. Divide the total portfolio risk in the graph into its nondiversifiable and diversifiable risk components, and label each of these on the graph.
  3. 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?
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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?
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?

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Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

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