Problem 3: Evaluating portfolio performanceAssume you have two investment opportunities.1. Corporate Disasters (CD) has expected returns E(RcD) = 4% and standard deviation ofreturns 9%.2. Nevada beach front properties (NBF) has expected returns E(RygF) = 10% and standarddeviation of returns 18%Risk free rate is R; = 1%.a) Calculate Sharpe ratios of these two portfolios.b) Assume you can invest only in one of those companies (and a risk free rate). Assumeyour target rate of return is 6%. Calculate portfolios with CD&RF and NBF&RF whichwould deliver this return. Which portfolio has smaller standard deviation and why?c) Assume you have a portfolio which is not efficient. Assume Corporate Disasters havemarket beta of ßep = 0.5 and Nevada beach front properties have market betaBNef = 4. Calculate Treynor measures for those securities. Which one should you add toyour portfolio to increase the Sharpe ratio.

Sharpe Ratio = [E(R) - Rf] / σ where E(R) is the expected return of the security, σ is the standard…

Answered: Problem 3: Evaluating portfolio…

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 6EP

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Two-Asset Portfolio Stock A has an expected return of 12% and a standard deviation of 40%. Stock B has an expected return of 18% and a standard deviation of 60%. The correlation coefficient between Stocks A and B is 0.2. What are the expected return and standard deviation of a portfolio invested 30% in Stock A and 70% in Stock B?
2) A risky portfolio is provided with an expected rate of return of 19.5%, standard deviation of 30% and risk free rate of 8.5%. If the client chooses to invest three different risky assets a proportion of equal investments and also in T bills. a) Determine weights of all the distributed assets. b) Determine the Sharpe ratio of the portfolio c) If the investment is done such a way that the expected return is maximized with standard deviation not exceeding 25%. Determine the investment proportion and expected return of the portfolio.
You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets. PORTFOLIO EXPECTED RETURN STANDARD DEVIATION Q 7.8% 10.5% R 10.0% 14.0% S 4.6% 5.0% T 11.7% 18.5% U 6.2% 7.5% a) For each portfolio, calculate the risk premium per unit of risk that you expect to receive [(E(R) –RFR)/ơ]. Assume that the risk free rate is 3.0%. b) Using…
Problem 2: You have access to three risky assets (Stocks A, B, and C) and ariskless asset:Expected Return, Standard DeviationStock A 8% , 35%Stock B 12% , 50%Stock C 15% , 75% Riskless Asset expected return 5%Correlation(A,B) 0.2Correlation(A,C) 0.2Correlation(B,C) -0.2 a) What are the portfolio weights of the tangency portfolio?b) What is the Sharpe ratio of the tangency portfolio?
You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets:Portfolio Expected Return Standard DeviationQ 7.8% 10.5%R 10.0 14.0S 4.6 5.0T 11.7 18.5U 6.2 7.5a. For each portfolio, calculate the risk premium per unit of risk that you expect to receive ([E(R) − RFR]/σ). Assume that the risk-free rate is 3.0 percent.b. Using your computations in Part a, explain which of these five portfolios is most likely tobe the market portfolio. Use your calculations to draw the capital market line (CML).c. If you are only willing to make an investment with σ = 7.0%, is it possible for you toearn a return of 7.0 percent?d. What is the minimum level of risk that would be necessary for an investment to earn7.0 percent? What is the composition of the portfolio along the CML that will generatethat expected return?e. Suppose you are now willing to make an investment…
Expected returns and standard deviations of three risky assets are as follows: Expected Return Standard Deviations Correlations A B C A 11% 30% 1.0 0.3 0.15 B 14.5% 45% 0.3 1.0 0.45 C 9% 30% 0.15 0.45 1.0 1. Calculate the expected return and standard deviations of a portfolio of stocks A, B and C. Assume an equal investment in each stock. 2. Compute the Sharpe ratio of a portfolio that has 30% in A, 30% in B and 40% in C. The risk-free interest rate is 4%. 3. Assume a portfolio of asset B and C. Determine the weight in asset B, such that the total portfolio risk is minimized.
PLEASE SHOW USING EXCEL You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index, yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%. 1- Draw the CML and your funds’ CAL on an expected return–standard deviation diagram. 2- What is the slope of the CML? 3- Characterize in one short paragraph the advantage of your fund over the passive fund. 4- Your client ponders whether to switch the 70% that is invested in your fund to the passive portfolio. Explain to your client the disadvantage of the switch. 5- Show him the maximum fee you could charge (as a percentage of the investment in your fund, deducted at the end of the year) that would leave him at least as well off investing in your fund as in the passive one. (Hint: The fee will lower the slope of his CAL by reducing the expected…
KINDLY ANSWER PART 5,6.and 7 Using the stock price data for any two companies provided below carry out the following tasks: 1.Compute, for each asset: i.Total Returns ii.Expected returns iii.standard deviation iv.Correlation Coefficient 2.Construct the variance-covariance matrix 3.Construct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 4.Reconstruct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 5.Use Solver to determine optimal risky portfolio. 6.Create hypothetical portfolios (commencing from Weight A=0 and weight B=100) 7.Calculate Expected return and Standard Deviation for all the above combinations 8.Graph the efficient frontier 9.Graph the optimal portfolio 10.Assuming that the investors prefers lower level of risk than what a portfolio of risky assets offer, introduce a risk free asset in the portfolio with a return of 3% 11.Using hypothetical weights (A= Portfolio of Risky…
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Consider a position consisting of a K200,000 investment in Asset A and a K300,000 investment in Asset B. Assume that the daily volatilities of the assets are 1.5% and 1.8% respectively, and that the coefficient of correlation between their returns is 0.4. What is the five day 95% Value at Risk (VaR) for the portfolio (95% confidence level represents 1.65 standard deviations on the left side of a normal distribution)?
You manage a risky portfolio containing 25% of Stock A, 32% of Stock B and 43% of Stock C, respectively, with expected rate of return of 18% and standard deviation of 28%. The Tbill rate is 8%. Draw the Capital Allocation Line (CAL) of your portfolio on an expected returnstandard deviation diagram. What is the slope of the CAL? Suppose that the client decides to invest in your portfolio a proportion y of the total investment budget so that the overall portfolio will have an expected rate of return of 16%. Show the position of your client on your fund’s CAL. What is the proportion y? What are your client’s investment proportions in your three stocks and the T-bill fund?
You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 30%. The T-bill rate is 6%. Your client’s degree of risk aversion is A = 3.4, assuming a utility function U = E(r) - ½Aσ². a. What proportion, y, of the total investment should be invested in your fund? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the expected value and standard deviation of the rate of return on your client’s optimized portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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