An investor with a risk aversion of 3.5 can buy a risk-free asset with an expected return of 3% and risky asset with an expected return of 25% and a standard deviation of 50%. What will be the expected return of the complete portfolio?

An investor with a risk aversion of 3.5 can buy a risk-free asset with an expected return of 3% and risky asset with an expected return of 25% and a standard deviation of 50%. What will be the expected return of the complete portfolio?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2P: APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free...

See similar textbooks

Related questions

Q: An ovedraft interest of 15%per annum is negotiated on the overdrawn balance at the end of each…

A: The objective of this question is to calculate the interest on an overdraft of R235,256 at an annual…

Q: mashed Pumpkins Company paid $112 in dividends and $547 in interest over the past year. The company…

A: EBIT (Earnings Before Interest and Taxes) is a financial metric that represents a company's…

Q: You have 20 years left for your retirement. You wish to accumulate a sum large enough by that time…

A: The objective of this question is to determine the amount of money that needs to be saved each month…

Q: [Ch 2] Use the following firm's balance sheet to answer the next three problems. All values in the…

A: The equity multiplier, also known as the leverage ratio, is a financial metric measuring the…

Q: Sunshine Corp hired a new CFO and changed firm's policy from zero leverage to some leverage. They…

A: WACC can be referred as the average capital cost based on weights assigned to specific source of…

Q: Even though most corporate bonds in the United States make coupon payments semiannually, bonds…

A: Bond price refers is the value which is used while trading in the market which reflects the…

Q: Interest rates on 3-year Treasury securities and 5-year Treasury securities are currently 4.5% and…

A: Treasury securities refer to the obligations of debt which are issued by the US Treasury department…

Q: For each of the following annuities, calculate the future value. Note: Do not round intermediate…

A: Annual paymentYearsInterest Rate$1,520109%$6,5403410%$3,64097%$8,3303611%

Q: Company XYZ has a bond issue outstanding that pays an 7.25% coupon semiannually with a maturity of…

A: Yield to maturity is the rate of return that the bondholders will get if they invest in bonds and…

Q: One year ago, you bought a stock for $57.04 a share. You received a dividend of $2.61 per share last…

A: Capital gains yield is the return arising due to increase in stock price in investment…

Q: Katherine Green is single with $146,000 in gross income from her job at the Caitlin Bank. During the…

A: Financial analysis involves assessing the financial health and performance of an individual,…

Q: Your team has proposed a strategy that will take sales from $1 million today to $5 million in 3…

A: Present Value (PV) of Sales = $1 million or $1,000,000Future Value (FV) of Sales = $5 million or…

Q: Eggz, Incorporated, is considering the purchase of new equipment that will allow the company to…

A: Initial investment = $495,000Working capital = $53,000Sales = $331,000Variable cost = 36% of…

Q: A project has an initial cost of $18,400 and produces cash inflows of $7,200, $8,900, and $7,500…

A: The discounted payback period is a financial metric used to evaluate the time it takes for an…

Q: Company A has sales of $830, costs of $290 (not including depreciation), depreciation expense of…

A: Total asset turnover shows the sales generated per dollar of total assets.The higher the value, the…

Q: Bond J has a coupon rate of 7 percent and Bond K has a coupon rate of 13 percent. Both bonds have 16…

A: Bond JBond KCoupon7%13%Maturity1616Mode of paymentSemi annualSemi annualPayments per year22YTM10%10%

Q: What is the standard deviation of the rate of return on your client's portfolio? (Round your…

A: The standard deviation of risky investment = 33%Standard deviation of security = 0%

Q: Required: a. What proportion, y, of the total investment should be invested in your fund? b. What…

A: The expected return is a useful tool for estimating the potential average profit or loss on an…

Q: McGilla Golf has decided to sell a new line of golf clubs. The company would like to know the…

A: Selling price of new units = $810Variable cost = $370Marketing study costs = $230,000R&D costs =…

Q: Using Table 5.3 as your guide, what is your estimate of the expected annual HPR on the market index…

A: The expected return is an estimate of potential investment profits. It determines how much money you…

Q: Stock Investment Stock's Beta Coefficient A $160 million 0.7 B 120 million 1.5 с 80 million 2.2 D 80…

A: ProbabilityMarket return0.1-28%0.20%0.413%0.232%0.148%Risk-free rate (Rf)4%StockInvestmentStock's…

Q: Halliford Corporation expects to have earnings this coming year of $2.93 per share. Halliford plans…

A: Earnings this year = $2.93 per shareExpected return = 20.7%Cost of equity capital = 8.5%To find: The…

Q: As of November 1, 1999, the exchange rate between the Brazilian real and U.S. dollar is R$1.99 per…

A: Current spot rate=R$1.99/$Inflation Brazil=20%US inflation=2.7%Find out one year forward rate.

Q: Assume that you manage a risky portfolio with an expected rate of return of 20% and a standard…

A: Standard deviation is the quantitative measure of risk of stock return and is measured as the…

Q: A corporation identifies an investment opportunity that will yield end of year cash flows of $35,000…

A: Initial Investment = $150,000Year 1 cash flow = $35,000Year 2 cash flow = $35,000Year 3 cash flow =…

Q: Domergue Corp. currently has an EPS of $3.10, and the benchmark PE for the company Is 30. Earnings…

A: The return of a stock is the gain or loss an investor experiences on their investment over a…

Q: With the following information, compute the net benefit of refinancing: Current loan balance:…

A: Refinancing is a financial strategy aimed at securing lower interest rates, reducing monthly…

Q: Zang Industries has hired the investment banking firm of Eric, Schwartz, & Mann (ESM) to help it go…

A: It refers to the offer price earned by evaluating the current value of equity in consideration of…

Q: In this problem, we consider replacing an existing electrical water heater with an array of solar…

A: Net cost of solar panels = $1,470Cost of operating water heater = $26.4 per monthLife = 9 yearsTo…

Q: Suppose a five-year, $1,000 bond with annual coupons has a price of $901.55 and a yield to maturity…

A: The coupon rate can be computed by using goal seek feature of excel. Firstly enter the formulas as…

Q: Exercise 10-12A (Algo) Determining the payback period LO 10-4 Fanning Airline Company is considering…

A: Investments:The investment refers to the current assets which is money invested by the individual in…

Q: U.S. Steel is considering a plant expansion to produce austenitic, precipitation hardened,duplex,…

A: TVM refers to the capacity of money to earn interest because money earned earlier is considered more…

Q: Jordan purchased 400 shares of GE at $16 per share. The price has dropped to $11 and he is…

A: Stocks or shares represent ownership in a company or organization which entitles the investors to a…

Q: One year ago, you purchased 454 shares of stock for $28.98 a share. The stock pays $1.02 a share in…

A: To calculate the total dollar return on your investment, we need to consider both the capital…

Q: Portage Bay Enterprises has $4 million in excess cash, no debt, and is expected to have free cash…

A: Free cash flow is the operating cash flow available after the deduction of all expenses, debts and…

Q: Watt's Lighting Stores made the following sales projection for the next six months. All sales are…

A: Watt's Lighting StoresCash Receipts ScheduleMarch - August MonthCredit Sales Collections from Prior…

Q: Timothy is retiring from his job soon at which time his employer will make the following offer: 1. A…

A: Based solely on the financial calculations, Option 2 seems to be the better choice due to the…

Q: Currently, the spot exchange rate is $1.67 per £ and the three-month forward exchange rate is $1.69…

A: Spot rate = $1.67 per poundForward rate = $1.69 per pound3-month interest rate in US = 8%3-month…

Q: Michael has split - limit coverage equal to 50/100/25 on his vehicle. Yesterday, Michael rear ended…

A: The objective of the question is to determine how much Michael's insurance company will pay him from…

Q: a) An investor is given the following information: Payoff State 1 State 2 Security Market prices…

A: Replicating Payoffs with the Use of Arrow-Debreu Securities: a) Approach and Fundamental…

Q: Wolfson Corporation has decided to purchase a new machine that costs $4 million. The machine will be…

A: NAL is the net present value of entering into a lease instead of buying an asset using borrowed…

Q: 1. The interest rate is 8.7% p.a. effective and the rate of inflation is 1% p.a. Compute the real…

A: answer is in the explanation sectionExplanation:1. Real Rate of Interest = Nominal Interest Rate -…

Q: Nikita Enterprises has bonds on the market making annual payments, with nine years to maturity, a…

A: Bond prices can be determined by calculating the present value of future earnings and the maturity…

Q: You buy a house of $450,000 today. You put a down payment of 20% and borrow a fixed-rate mortgage of…

A: You bought a house for $450,000 with a $90,000 down payment and a $360,000 mortgage at 4% for 15…

Q: Suppose that the current spot exchange rate is €1.72 per £ and the one-year forward exchange rate is…

A: The objective of this question is to understand the concept of covered interest arbitrage and how it…

Q: a two-year, zero-coupon, risk-free bond? The price per $100 face value of the two-year, zero-coupon,…

A: Face value = $100YTM = 5.48%Number of years = 2 years

Q: A company wants to add a manufacturing machine to an existing factory to accommodate rising demand…

A: Payback periodThe time taken for an investment to earn the initial money invested in it is called…

Q: Consider the following information: Rate of Return if State Occurs State of Economy Probability of…

A: Probability recession = p1 = 0.17Probability normal = p2 = 0.62Probability boom = p3 = 0.21Stock A…

Q: 4. Assume that you have two projects (A and B) the life of the two proposals with the respective net…

A: Capital budgeting is the process of evaluating various investment proposals on grounds of financial…

Q: Jonas borrowed $8,000 on a 60-day 10% note. Jonas paid $4,000 toward the note on day 40. On day 50,…

A: The objective of the question is to calculate the adjusted balance of Jonas's loan after the first…

Question

An investor with a risk aversion of 3.5 can buy a risk-free asset with an expected
return of 3% and risky asset with an expected return of 25% and a standard
deviation of 50%. What will be the expected return of the complete portfolio?
8.5%
9.2%
10.7%
12.1%

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Definition of Portfolio

VIEW

Step 2: Computation of the expected return of portfolio

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

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

You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?
APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent.The risk-free rate is 4 percent, and the expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. Compute and justify the expected rate of return would a security earn if it had a 0.45 correlation with the market portfolio and a standard deviation of 55 percent.
An investor can design a complete portfolio based on a risky portfolio and a risk-free asset. The risky portfolio has an expected return of 10% and a standard deviation of 20%. Risk-free rate is 5%. If the investment weight on the risky portfolio is 70% and the weight on the risk-free asset is 30%, what is expected return and standard deviation of the complete portfolio?
Suppose you have $2,000 to invest. The market portfolio has an expected return of 10.5 percent and a standard deviation of 16 percent. The risk-free rate is 3.75 percent. How much should you invest in the risk-free asset if you wish to have a 15 percent return on the portfolio?
Suppose that you have $1 million and the following two opportunities from which to construct a portfolio:a. Risk-free asset earning 12% per year.b. Risky asset with expected return of 30% per year and standard deviation of 40%.If you construct a portfolio with a standard deviation of 30%, what is its expected rate of return?
Suppose you have $20,000 available to invest and the risk-free rate, as well as your borrowing rate, is 3%, and the expected return on the risky portfolio is 12%. The standard deviation of the risky portfolio is 18%. If you construct a complete portfolio with an expected return of 9%, the standard deviation of your portfolio is _______%.
An investor invests 60% of his wealth in a risky asset which has an expected return of 15% and a variance of 4% and 40% of his wealth in a risk-free security that pays 6% return. What is the expected return and standard deviation of the portfolio? A. 0% and 12.0%, respectively B. 6% and 8.0%, respectively C. 6% and 10.0%, respectively D. 4% and 12.0%, respectively
You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.08? Group of answer choices 50.5% and 49.50% 61.9% and 38.1% 30.1% and 69.9% 60.0% and 40.0% Cannot be determined.
The market portfolio has an expected return of 11.5 percent and a standard deviation of 19 percent. The risk-free rate is 4.1 percent. **You are required to calculate any extra information i.e. beta, covariance if necessary Calculate the expected return on well-diversified portfolio with a standard deviation of 9 percent; and the standard deviation of a well-diversified portfolio if the expected return is 20 percent.
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 12 percent and 15 percent, respectively. The standard deviations of the assets are 29 percent and 48 percent, respectively. The correlation between the two assets is .25 and the risk-free rate is 5 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year with a probability of 2.5 percent?
Suppose the risk-free rate is 6 percent and the market portfolio has an expected return of 12 percent. The market portfolio has a standard deviation of 7 percent. Portfolio Z has a correlation coefficient with the market of 0.35 and standard deviation of 6 percent. According to the capital asset pricing model, what is the expected return on portfolio Z a. 12.6 percent b. 7.8 percent c. 9.87 percent d. 12.05 percent