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- j. An undiversified portfolio with a beta of 2.0 is less than twice as risky as the market portfolio. multiple choice 10 True FalseQuestions 31 through 36 are related. 31. If a change in the investment environment leads to an increase in the Risk-Free Rate while the Return on the Market Portfolio remains constant, the Market Risk Premium [Rm - Rf] would be expected to: a. Increase. b. Decrease. c. Remain Unchanged. d. Cannot be determined. e. None of the above answers is correct.Consider following information on a risky portfolio, risk-free asset and the market index. What is the Sharpe ratio of the market index? Risky portfolio Risk-free asset Market index Average return 8.2% 2% 6% Std. Dev. 26% 20% Residual std. dev. 10% Alpha 1.4% Beta 1.2
- Probability State of of State of Economy Economy 0.50 0.50 Bust Boom State of Economy Bust Boom Calculate the expected return on a portfolio of 65 percent Roll and 35 percent Ross by filling in the following table: Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Probability of State of Economy Security Returns if State Occurs 0.50 0.50 Roll -14% 25% Ross 18% 6% Portfolio Return if State Occurs % % E(Rp)= Product % % %Example of CAPM Equation: Case Risk free Rate (Rf) Market return (Km) Beta (b) Required Return A 5% 8% 1.30 ? B 8% 13% 0.90 ? C 10% 15% -0.20% ? D ? 12% 1.0 12% E 6% ? 0.60 9% F 5% 16% ? 10% Required: Using CAPM equation, compute the missing value (?)A4) Finance which of the following statements on consumption-based asset pricing are correct? 1. The power utility model predicts that the variance of consumption growth is positively related to the risk-free rate. 2. Assets that perform well when marginal utility is high should earn lower expected returns. 3. In the data, consumption growth is smooth with low standard deviation relative to stock returns. 4. In the data, the sharpe ratio of the market portfolio is about 50% per year. This implies the standard deviation of any valid stochastic discount factor that can explain the equity risk premium puzzle must be less than 50%
- Consider the following information: Standard Deviation. Beta Security T 30% 1.90 Security K. 30% 1.20 a. Which security has more total risk? b. Which security has more systematic risk? c. Which security should have the higher expected return? d. What does the total risk consist of? What kind of risk is eliminated with portfolio diversification?Consider the following information: Standard Deviation Beta Security T 30% 1.90 Security K 30% 1.20 Which security has more total risk? Which security has more systematic risk? Which security should have the higher expected return? What does the total risk consist of? What kind of risk is eliminated with portfolio diversification?Required Return Beta Risk-Free Rate Market Return A 12.5% 0.90 8% ? B 9.0% 1.3 ? 8% C 10.0% ? 7.5% 10.5% a. What is the market return? b. What is the Risk-free rate? c. What is the beta?
- 6) Assume that stock market returns do follow a single-index structure. An investment fund analyzes 1000 stocks in order to construct a mean-variance efficient portfolio constrained by 500 investments. They will need to calculate ________ estimates of firm-specific variances and ________ estimate/estimates for the variance of the macroeconomic factor. A) 500; 1 B) 1000; 1 C) 124,750; 1 D) 124,750; 500 E) 250,000; 500 Choose the correct option th justification.28) A manager who evaluates portfolios' investment performance adjusted for market risk is most likely to rank portfolios based on their: Select one or more: Sharpe ratio Treynor measure Jensen's Alpha measure M-squared measuresConsider 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 .