Investment Alternatives Corn Belt (1) Central Valley (2) Great Plains (3) Exp. Return ri =0.14 r2=0.12 r3=0.07 Std. Dev. 01=0.08 02=0.05 03=0.01 Weight in Portfolio Wi=1/3 W2=1/3 W3=1/3 Correlation Among Investment 1 and 2 (p12) = 0.30 1 and 3 (P13) = -0.40 2 and 3 (p23) = -0.10 Portfolio Data for Financial Servicing Analysis Under Risk a. Calculate the expected return of the portfolio. b. Calculate the variance and the standard deviation of the portfolio. c. Calculate the variance and standard deviation of the portfolio assuming that the correlation among the investments is all equal to 0.

Investment Alternatives Corn Belt (1) Central Valley (2) Great Plains (3) Exp. Return ri =0.14 r2=0.12 r3=0.07 Std. Dev. 01=0.08 02=0.05 03=0.01 Weight in Portfolio Wi=1/3 W2=1/3 W3=1/3 Correlation Among Investment 1 and 2 (p12) = 0.30 1 and 3 (P13) = -0.40 2 and 3 (p23) = -0.10 Portfolio Data for Financial Servicing Analysis Under Risk a. Calculate the expected return of the portfolio. b. Calculate the variance and the standard deviation of the portfolio. c. Calculate the variance and standard deviation of the portfolio assuming that the correlation among the investments is all equal to 0.

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 6EP

See similar textbooks

Similar questions

Consider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%. a) According to asset i’s return forecast, calculate αi. (b) Calculate the optimal weight of combining asset i and the index portfolio M . (c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .
Consider the following information about the various states of economy and the returns ofvarious investment alternatives for each scenario. Answer the questions that follow.% Return on T-Bills, Stocks and MarketIndexState of the Economy Probability TBills Phillips PayupRubbermadeMarketIndexRecession 0.2 7 -22 28 10 -13Below Average 0.1 7 -2 14.7 -10 1Average 0.3 7 20 0 7 15Above Average 0.3 7 35 -10 45 29Boom 0.1 7 50 -20 30 43MeanStandard DeviationCoefficient of VariationCovariance with MPCorrelation with Market IndexBetaCAPM Req. ReturnValuation(Overvalued/Undervalued/FairlyValued)Nature of stock(Aggressive/Defensive)Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Each line item is worth 2 marksQuestion 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…
Consider the following information about the various states of economy and the returns ofvarious investment alternatives for each scenario. Answer the questions that follow.% Return on T-Bills, Stocks and MarketIndexState of the Economy Probability TBills Phillips PayupRubbermadeMarketIndexRecession 0.2 7 -22 28 10 -13Below Average 0.1 7 -2 14.7 -10 1Average 0.3 7 20 0 7 15Above Average 0.3 7 35 -10 45 29Boom 0.1 7 50 -20 30 43MeanStandard DeviationCoefficient of VariationCovariance with MPCorrelation with Market IndexBetaCAPM Req. ReturnValuation(Overvalued/Undervalued/FairlyValued)Nature of stock(Aggressive/Defensive)Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline 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 Management Inc. (IMI) uses the capital market line to make asset allocation recommendations. IMI derives the following forecasts:∙ Expected return on the market portfolio: 12%. ∙ Standard deviation on the market portfolio: 20%∙ Risk-free rate: 5%Samuel Johnson seeks IMI’s advice for a portfolio asset allocation. Johnson informs IMI that he wants the standard deviation of the portfolio to equal half of the standard deviation for the market portfolio. Using the capital market line, what expected return can IMI provide subject to Johnson’s risk constraint?
Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM) and its graphical representation, the security market line (SML). Relevant information is presented in the following table ITEM RATE OF RETURN BETA Risk-free asset 9% 0.0 Market portfolio 14% 1.0 Project A - 1.5 Project B - 0.75 Project C - 2.00 Project D - 0.0 Project E - -0.50 Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk. Use your findings in part a to draw the security market line (required rate of return relative to nondiversifiable risk) Discuss the relative nondiversifiable risk of projects A through E. Assume that recent economic events have caused investors to become less risk-averse, causing the market return to decline to 12%. Calculate the new required returns fcor assets A through E and draw the new security market line on the same graph you drew for b. Compare your findings…
A firm is considering the following independent projects. Project Investment Present value offuture cash flows NPV A $130 $176 $46 B $103 $115 $12 C $183 $287 $104 D $161 $199 $38 E $184 $273 $89 What is the Profitability Index of Project B? Question 5Answer a. 0.85 b. 1.12 c. 0.89 d. 1.18
Project A has the following estimated cash flows and present values:Year Cash flow $ Discount factor@ 12% Present value $0 Cost (95 000) 1.0 (95 000) 1–5 Contributionper annum 50 000 3.605 180 250 1–5 Fixed costsper annum (25 000) 3.605 (90 125) 5 Residual value 20 000 0.567 11 340 The benefit of using sensitivity analysis in an investment appraisal would be:
The investment timing decision is aimed at analyzingwhether the00:30:40eBookMutune Choicecash flowsoccur at the beginning or end of a year.payback periodor NPV analysis should be used.project is a borrowingor lending project Investment should occur now or atsome future point.
Consider the case of two financial assets and three market conditions (states). The tablebelow gives the respective probability for each market condition and the return of each assetin each one of them. Market Conditions State Recession Normal Expansion Probability of state 30% 40% 30% Return of asset A -30% 20% 55% Return of asset B -10% 70% 0% Consider the portfolio with 50% investment in each of the two assets above. Calculatethe expected return and the standard deviation of the portfolio.
Excel Questions 1) What would happen to the contribution of asset allocation to overall performance if the actual weights had been 75/12/13 instead of 70/7/23? Explain your result. 2) What would happen to the contribution of security selection to overall performance if the actual return on the equity portfolio had been 8.28% instead of 7.28% and the return on the bond portfolio had been .89% instead of 1.89%? Explain your result. Below is the Table of Actual Weights at 70/7/23 Performance Attribution Bogey Bogey Portfolio Benchmark Return on Portfolio Component Index Weight Index Return Equity S&P 500 0.6 5.81% 3.4860% Bonds Aggregate Index 0.3 1.45% 0.4350% Cash Money Market 0.1 0.48% 0.0480% Return on Bogey 3.9690% Actual Managed Managed Portfolio Portfolio Actual Portfolio Component Weight Return Return Equity 0.70 7.28% 5.0960% Bonds 0.07 1.89% 0.1323%…
Consider the following two mutually exclusive investment projects:Project Cash Flowsn A B 0 -$4,000 -$8,5001 $400 $11,5002 $7,000 $400Assume that the MARR = 15%.(a) Using the NPW criterion, which project would you select?(b) On the same chart, sketch the PW(i) function for each alternative fori = 0% and 50%. For what range of i would you prefer Project B?
Wolff Enterprises must consider one investment project using the capital asset pricing model (CAPM). Relevant information is presented in the following table. Item Rate of return Beta, b Risk-free asset 9% 0.00 Market portfolio 14% 1.00 Project 1.74 a. Calculate the required rate of return for the project, given its level of nondiversifiable risk. b. Calculate the risk premium for the project, given its level of nondiverisifiable risk.