Consider the following financial market with tworisky assets x and y as well as a risk-free asset f:E[r].x (10%, 8%)•z (6.6%, 6.3%)y (8%, 5%)(0%, 3%) fIs it possible to construct portfolio z with existingassets? Explain.

Any location or system that gives buyers and sellers the ability to exchange financial assets, such…

Consider the following financial market with two risky assets x and y as well as a risk-free asset f: (0%, 3%) f z (6.6%, 6.3%) x (10%, 8%) y (8%, 5%) O Is it possible to construct portfolio z with existing assets? Explain.

Consider the following financial market with two risky assets x and y as well as a risk-free asset f: (0%, 3%) f z (6.6%, 6.3%) x (10%, 8%) y (8%, 5%) O Is it possible to construct portfolio z with existing assets? Explain.

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 7MC: Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the...

See similar textbooks

Related questions

Q: The current exchange rate between the United States and Britan is $2.0 per pound. The 6- month…

A: Given, The exchange rate is $2.0 per pound The six month forward rate is $1.95 per pound Interest…

Q: A Corp. and B Company will be merging. Independently, A has forecasted annual earnings of P400,000…

A: Synergy is a type of creation of additional value when two companies are together in merger. It will…

Q: A loan of $28,100 at 4.28% compounded semi-annually is to be repaid with payments at the end of…

A: Present value of annuity Annuity is a series of equal periodic payment at equal interval over a…

Q: An $84,000 business can be purchased by making a down payment of $14,000 and financing the balance…

A: Loan is defined as the money that are given to some other party in an exchange for making the…

Q: Find the amount to which $1,000 will mature in 3.5 years at 7 ¾% p.a.

A: To calculate the future value we will use the below formula Future value = P*(1+r)n Where P -…

Q: ain why would a firm consider investing in a portfolio of foreign currencies instead of just a…

A: Firms always invest in different currencies while doing the business at international levels but…

Q: The planned initial markup in a department, as indicated on the merchandise plan, is 42.5%. The…

A: OTB means option to buy , this strategy helpful for retailer to buy a product with estimated money…

Q: BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 5.0…

A: Here, Current Dividend is $0.85 Growth Rate is 5% Stock Price is $82 Coupon Rate is 6% Quoted Price…

Q: You are saving for retirement. To live comfortably, you decide you will need to save $3 Million by…

A: Annual deposit is calculated using following equation Annual deposit = FV×i[(1+i)n-1]×(1+i) Where,…

Q: 1. Sunny Day Manufacturing Company has a current stock price of $22.35 per share, and is expected to…

A: Price of the stock (P0) = $22.35 Next dividend (D1) = $1.36 Growth rate (g) = 0.094 or 9.40%…

Q: offered her a 30-year fixed rate mortgage at 5.83%. What will be Angelina's monthly mortgage…

A: Information Provided: Home cost = $417,000 Down payment = $26,000 Interest rate = 5.83% Years = 30…

Q: er questions 8 and 9

A: Cost of equity with a constant growth in dividend With next year dividend (D1), constant growth rate…

Q: Year 1 2 3 4 5 Unit Sales 90,000 100,000 110,000 117,000 65,000 oduction of the trail mix will…

A: NPV It is a capital budgeting tool that helps to decide on whether the capital project should be…

Q: The current yield on the bond is:

A: Current yield = coupan payment / bond price

Q: at is the weighted average cost of capital (WACC) for ABC Limited which has the following capital…

A: Weighted average cost of capital is weighted cost of equity and weighted cost of debt that is hurdle…

Q: A particular service can be purchased for $100 per unit. The same service can be provided by…

A: Internal Rate of return is a capital budgeting techniques which help in knowing the actual rate of…

Q: 1. Which of the following is a source of cash flows? A) increase in marketable securities C)…

A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: What is the value of the following semi-annual bond? years face value: maturity: coupon rate:…

A: Present value of bond is calculated with the help of NPV method of capital budgeting techniques.…

Q: Gordon growth growth rate for Kaskad? 23. Analysts are projecting that Halyk Bank will have earnings…

A: Price earning ratio is the ratio of market price of the share to the earnings per share of the…

Q: If the cost of a telecommunications share is $285.55, calculate the end of quarter dividends that it…

A: Cost of share (P0) = $285.55 Dividend rate = 0.055 Quarterly dividend rate (r) = 0.01375 (i.e. 0.055…

Q: What is the present value of the following set of cash flows at an interest rate of 8% p.a.…

A: The concept of present value states that a sum of money today is worth more than the same sum in the…

Q: O the time you set for accomplishing the goal

A: SMART goals refer to the Specific, Measurable, Attainable, Relevant, and Timebound. It is helpful…

Q: A company expects to need to increase their net working capital by $200,000 at the beginning of a…

A: At the beginning of the project, the investment in working capital of 200000 is a cash outflow.

Q: Calculate the amount of simple interest payable if a person borrowed $25 500 at a simple interest…

A: Simple interest is the method of calculating interest when the interest earned does not get…

Q: David invests $300 into an account with a 2.3% interest rate that is compounded semiannually. How…

A: Time value of money (TVM) refers to the method or concept which is used to determine the amount of…

Q: Which investment should be selected according to the following methods: a) IRR-internal rate of…

A: IRR (Internal Rate of Return): It is the rate at which the project yield zero net present value.…

Q: You bought 70 shares of a mutual fund one year ago for $50 per share. The front-end load is 5…

A: Given: Purchase price = $50 Front end load = 5% Dividend per share = $2 Increase in value = 15%

Q: What is the relevant range of CVP?

A: The relevant range of CVP are as under

Q: Question: BRICS Company has a beta of 0.8. The risk-free rate is equal to 3% and the expected market…

A: Expected return is calculated under CAPM is also called KE ( Cost of equity). It is that which was…

Q: A University needs to acquire a boiler for its restaurant. There are three possibilities for…

A: A cost analysis is used for measuring and ranking various alternatives by using the concept of the…

Q: Initial Cost of $55,000, annual O&M costs of $800 increasing by $100 annually, salvage value of…

A: In this question , we will be calculating the depreciation for each year and book value using the…

Q: 5. Chris's Photographic Supplies sells a Minolta camera for $551.83. The markup is 72% of cost. a)…

A: As per Bartleby honor code, when multiple questions are asked, the expert is required only to solve…

Q: Why is it that oftentimes banks refuse to lend to many borrowers even though they offer high…

A: Analysis of the given option: i) To reduce the exposure to diversification risk Remark-By…

Q: Individual industries will use energy as efficiently as it is economical to do so, and there are…

A: After tax salvage value is calculated as shown below. After tax salvage value=Market value-Tax…

Q: what does variable 5-5-5 cap 2 loan mean? Suppose a variable 5-5-5 cap 2 loan. Total maturity is 20…

A: An essential component is the 28/36 ratio, which defines a consumer's financial situation. It helps…

Q: What is the delta of the put option? Solution for A = -0.40 b) You short 100 put options. How…

A: Black-Scholes Merton Model: This model is used to compute the price of options contracts. The…

Q: Summarize some of the impacts that the Coronavirus impact has had on the risks that organizations…

A: Due to corona virus there has been much impact on the organizations and even some of them have…

Q: Iculate the term, expressed in years and months, for each of the following ordinary general…

A: The future value of annuity includes the amount being deposited and amount of interest being…

Q: provided. After careful deliberation. Hope decides on a plan from Acadian Alliance Life Insurance…

A: Answer (a)

Q: You are given the following data about Asset A and Asset B.…

A: Standard deviation is the measure of risk and it gives idea about the risk involved in security.…

Q: BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 6.0…

A: Here, Current Dividend is $0.85 Growth Rate is 6% Stock Price is $82 Coupon Rate is 6% Quoted Price…

Q: alculate the simple interest earned on an investment of: $4 200 at 4.5% for 200 days Select one:…

A: We need to use simple interest formula to calculate simple interest Simple interest…

Q: Harvey Gorman expects earnings of $92.5 million at the end of the year (at t=1) and to pay dividends…

A: Dividend discount model It is used to calculate the value of equity. The sum of the present value of…

Q: ack’s Jax has total fixed costs of $25,000. If the company’s contribution margin is 60%, the income…

A: Contribution margin is an important metric in finance related to income statement analysis.…

Q: Mike has a credit card balance of $30,000. The annual interest rate is 17%. He is required to pay a…

A: Credit Balance $ 30,000.00 Annual Interest Rate 17% Minimum Payment 4% or $ 50.00…

Q: traditional debt and alternative financing instruments f

A: Entrepreneurs refer to a person who is establishing a business for taking financial risks and…

Q: 3. Consider a two-year coupon bond with a face value of $1,000 and a coupon rate of 5%. Investor A…

A: As per the honor code of Bartleby we are bound to give the answer of first three sub parts, please…

Q: hat role insurance companies can play role in export and import among the count

A: Insurance companies very big role in the export and import of the country and they have very…

Q: Sanford Corporation's bonds currently sell for $798.70 and have 10 yars to maturity. The bonds have…

A: Price of the bond = $798.70 Maturity period = 10 years Coupon rate = 5% or 0.05 Yield to maturity…

Q: Suppose a state lottery prize of $3 million is to be paid in 5 payments of $600,000 each at the end…

A: We will apply the concept of time value of money here. As per the concept of time value of money the…

Concept explainers

Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.

Question

Consider the following financial market with two
risky assets x and y as well as a risk-free asset f:
E[r].
x (10%, 8%)
•z (6.6%, 6.3%)
y (8%, 5%)
(0%, 3%) f
Is it possible to construct portfolio z with existing
assets? Explain.

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

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps with 3 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

Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the plotted CML. Now add a set of indifference curves and illustrate how an investors optimal portfolio is some combination of the risky portfolio and the risk-free asset. What is the composition of the risky portfolio?
Assume CAPM holds. Consider a portfolio that consist of a risk-free asset and two risky assets A and B such that they are in equal supply in the market. This implies that the market portfolio M = 0.5A +0.5B. Given that µM = 11%, σA = 20%,σB = 40%,ρAB = 0.75 and the risk-free rate is 2%. Compute: a) The beta factor for each security. b) The values for µA and µB and verify these quantities via the SML.
We believe that the single factor model can predict any individual asset’s realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + βiF + Ei, where E(ei) = 0 and Cov(F, i) = 0 A B β 1.2 0.8 E(r) 0.1 0.08 (1) What is the rate of return of the risk-free asset? (2) What is the expected rate of return of the well-diversified portfolio C with βC = 1.6, which also exists in the market? (3) A fund constructs a well-diversified portfolio D. Studies show that βD = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?
Consider a portfolio consisting of the below securities with the below characteristics: Security Amount Invested($) Beta Expected Return A 1,5 MIL 1.0 12.0%B 1.0 MIL 1.5 13.5%C 2.0 MIL 0.8 9.0% Required:a) Calculate the portfolio’s Beta. b) Calculate the portfolio’s expected return. c) Discuss the Capital Asset Pricing Model (CAPM) explaining what it is used forand which are its limitations.
Consider the following information (Assume that Security M and Security N are in the same financial market): Standard Deviation BetaSecurity M 20% 1.25Security N 30% 0.80 Which security should have higher expected return? Group of answer choices Security M Security N Equal
Suppose you observe the following situation:Security Beta Expected ReturnDiamond Co 1.3 0.2Spade Co 0.8 0.14 (a) According to the above information, could we figure out the market return and risk-free rate? Explain your answer. (b) Discuss the possibility of including zero beta or negative beta assets in your portfolio. Explain the pros and cons of including these types of assets.
How to set-up this problem? Refer to the following example for part i) Risk-free rate of return = 3% Market return (or market portfolio's rate of return) = 10% IBM stock's beta = 1.2 Then, based on the CAPM (capital asset pricing model), IBM stock's required rate of return (or minimum acceptable return or fair rate of return) = risk-free return + beta*(market return minus risk-free return) = 3% + 1.2*(10% - 3%) = 11.4% Also, the market risk premium (or market portfolio's risk premium) = market return minus risk-free return = 10% - 3% = 7% HERE IS THE QUESTION i) suppose that a stock's beta is 0.7. If the risk-free rate of return is 4% and the market risk premium is 8%, what is the stock's required rate of return?
The CAPM states that the expected (required) return on an asset is : E(Ri)=Rf+βi[E(RM)−Rf] where the term in square brackets is the risk-premium earned by the market portfolio. Therefore, the beta of the market portfolio (βM) must be equal to __________ . A) zero B) 0.5 C) 1.0 D) an unknown estimate
Assume for parts (a) to (h) that the Capital Asset Pricing Model holds. The marketportfolio has an expected return of 5%. Stock A’s return has a market beta of 1.5, anexpected value of 7% and a standard deviation of 10%. Stock B’s return has amarket beta of 0.5 and a standard deviation of 20%. The correlation between stockA’s and stock B’s return is 0.5.Required:a) Explain the term ‘capital asset pricing model.’b) What is the risk-free rate?c) What is the expected return on stock B?d) Draw a graph with expected return on the y-axis and beta on the x-axis. Indicate the approximate position of the risk-free asset, the market portfolio and stocks A and B on this graph. Draw the line, which connects these four points.e) Explain the term ‘Securities Market Line’, and what is the slope of the SML for this economy?f) Consider a portfolio with a weight of 50% in stock A and 50% in stock B. What are its variance and expected return?g) Where would under-priced and over-priced securities plot on…
Using the information provided in the pictures: Let’s assume, you want to construct a portfolio of risky and riskfreeassets. You wish to generate a 7% return for your complete portfolio E(rc). Using the Capital AllocationLine (CAL) equation - E(rc) = rf + y(E(Rp) - rf)a. Calculate the portion that you need to invest in risky assets and (b). in risk-free assets.c. Calculate the standard deviation of the portfolio.
multiple choice, Security X has an expected rate of return E(R) of 0.11 and a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.08. According to the Capital Asset Pricing Model (CAPM), this security is underpriced. overpriced. fairly priced. cannot be determined from data provided.
Consider the following information (Assume that Security M and Security N are in the same financial market): Standard Deviation BetaSecurity M 20% 1.25Security N 30% 0.80 Which security has more total risk? Group of answer choices Security M Security N Equal