a) Jim Bowles is an investor who believes the economy is gaining strength and there fore wishes to increase the risk of his 14-security portfolio. Each security has a current market value of $5,000, and the current beta of the portfolio is1.02. The beta of the least risky security is 0.76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then?

a) Jim Bowles is an investor who believes the economy is gaining strength and there fore wishes to increase the risk of his 14-security portfolio. Each security has a current market value of $5,000, and the current beta of the portfolio is1.02. The beta of the least risky security is 0.76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Jim Bowles is an investor who believes the economy is gaining strength and therefore wishes to increase the risk of his 14-security portfolio. Each security has a current market value of $5,000 and the current beta of the portfolio is 1.02. The beta of the least risky security is 0.76. If Jim replaces the least risky security with another security with the same market value but a beta of 1.45, what will the portfolio beta be then?
a) Suppose the risk-free rate is 7% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations b) explain when a security is overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model.
a) Suppose the risk-free rate is `X'% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your results. b) Using a graph, explain when a security is overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model. Plot your answer from (a) onto this graph.
8. Suppose security X achieves 20% return with half chance and -10% return with half chance. (a) What is the expected return of X? What is the risk (return volatility) of X? (b) Suppose security Y achieves 22% return with 55% chance and -8% return with 45% chance. Suppose you like return and dislike risk (just like all investors). Suppose you can only invest in one of the two securities. Which security (X or Y) would you choose, and why?
You invest $700 in a security with a beta of 1.4 and $300 in another security with a beta of 0.8. The beta of the resulting portfolio is _________ Group of answer choices a. 1.40 b. 1.00 c. 0.36 d. 1.22 e. 0.80
a) Suppose the risk-free rate is 1% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your results
(a) Determine the expected return of security X (b) 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?
You want your portfolio beta to be 1.30. Currently, your portfolio consists of $100 invested in stock A with a beta of 1.4 and $300 in stock B with a beta of .6. You have another $400 to invest and want to divide it between an asset with a beta of 1.8 and a risk-free asset. How much should you invest in the risk-free asset?
Question 1) Federico wants to calculate the expected rate of return for security for his work as a freelance investment banker. He has the following figures to calculate CAPM: the risk-free interest rate is 4%, the expected return of the market is 17%, and the risk index of the security is 1.40.
Janet has a portfolio of 8 securities, each with a market value of $5,000. The current beta of the portfolio is 1.28, and the beta of the riskiest security is 1.75. She wishes to reduce her portfolio beta to 1.15 by selling the riskiest security and replacing it with another security with a lower beta. What must be the beta of the replacement security?
a) Suppose the risk-free rate is 5% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your results b)Stock 1 has a standard deviation of return of 6%. Stock 2 has a standard deviation of return of 2%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio? Please provide the details of your calculations and discuss your results. You decide now to combine your portfolio (discussed in question b) with another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero. d) What is the standard deviation of…
Mr. Karim is an investment banking analyst at Benchmark Financial, and hewants to calculate the expected rate of return for a security. He finds that thesystematic risk “b” of the security is 1.2. He also knows that the risk-free rateis 3%, and the expected return of the market is 12%. Mr. Karim uses the CAPMmodel to calculate the expected rate of return and determine if theinvestment should be undertaken. Please show the computation as perdecision taken by Mr. Karim.

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