standard deviation of 12%. An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must:
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- Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of −0.25, and a beta coefficient of −0.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of 0.75, and a beta coefficient of 0.5. Which security is more risky? Why?You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the value of diversification or why stocks with the biggest standard deviations dont always have the highest expected returns. Your assignment is to address the clients concerns by showing the client how to answer the following questions: d. Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the x-axis and expected rate of return on the y-axis. Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient. What makes a particular portfolio efficient? Dont worry about specific values when constructing the graphmerely illustrate how things look with reasonable data.A portfolio that combines the risk-free asset and the market portfolio has an expected return of 6.4 percent and a standard deviation of 9.4 percent. The risk-free rate is 3.4 percent, and the expected return on the market portfolio is 11.4 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .39 correlation with the market portfolio and a standard deviation of 54.4 percent? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
- An investor has an opportunity to invest in two risky assets and a risk-free asset. Theexpected return of the two risky assets are μ1 = 0.12, μ2 = 0.15. Their standarddeviations are σ1 = 0.05 and σ2 = 0.1, and the correlation coefficient between theirreturn is 0.2. The risk-free rate is 0.05. Suppose the investor has $1000 and he wantsto hold a portfolio with expected return of 0.1. If the investor is risk averse, how muchshould he invest in the two risky assets and the risk-free asset?Suppose that there are two assets: A and B. Asset A has expected return of 20%. B has expected return of 12% and standard deviation of σ* σ* = standard Deviation (σ) (a) “As B is strictly dominated by A in terms of total risk (standard deviation), there is no value in having B in portfolio formation.” (Without doing any calculation) (b) “If the correlation coefficient ρ between A and B = 1, it is always optimal to invest in A only.” (Show your proof) (c) “If the correlation coefficient ρ between A and B = -1, it is always optimal to invest in 50% in A and 50% in B when forming a minimum variance portfolio of the two.” (Show your proof) [ (d) “Given that σA= σB=σ*, it is always optimal to combine half of A and half of B when forming a minimum variance portfolio of the two when ρ ε (-1,1).” (Show your proof)Drew can design a risky portfolio based on two risky assets, Origami and Gamiori. Origami has an expected return of 13% and a standard deviation of 20%. Gamiori has an expected return of 6% and a standard deviation of 10%. The correlation coefficient between the returns of Origami and Gamiori is 0.30. The risk-free rate of return is 2%. What is the Sharpe ratio of the optimal risky portfolio? A. 60.26% B. 12.19% C. 9.34% D. 47.78%
- 1. Consider a Treasury bill with a rate of return of 1% and the following risky securities: Security A: E(r) =0.1; variance = 0.03; Security B: E(r) = 0.015; variance = 0.0225; Security C: E(r) = 0.07; variance = 0.04; Security D: E(r) = 0.25; variance = 0.25.The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________." A B C D 2. Security with normally distributed returns has an annual expected return of 10% and a standard deviation of 6%. The probability of getting a return between -1.76% and 21.76% in any one year is NOTE: All answers should be express in strictly numerical terms. For example, if the answer is 5%, write 0.05Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%. The risk-free portfolio that can be formed with the two securities will earn a(n) _____ rate of return. A) 8.5% B) 9.0% C) 8.9% D) 9.9%Consider a T-bill with a rate of return of 6% and the following risky securities: Security A: E(r) = 9%; Standard Deviation = 9% Security B: E(r) = 10%; Standard Deviation = 11% security C: E(r)= 16%; Standard Deviation = 20% Security D: E(r) = 18%; Standard Deviation = 26% From which set of portfolios, formed with the T-bill and any one of the four risky securities, woulda risk-averse investor always choose his portfolio? Select one: A. The set of portfolios formed with the T-bill and security D. B.The set of portfolios formed with the T-bill and security A. oC. The set of portfolios formed with the T-bill and security B. D. The set of portfolios formed with the T-bill and security c. E. Cannot be determined.
- Consider a treasury bill with a rate of return of 5% and the following risky securities:Security A: E(r) = .15; variance = .0400Security B: E(r) = .10; variance = .0225Security C: E(r) = .12; variance = .1000Security D: E(r) = .13; variance = .0625The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of his complete portfolio to achieve the best Sharpe ratio would be?Assume an economy in which there are three securities: Stock A with rA = 10% and σA = 10%; Stock B with rB = 15% and σB = 20%; and a riskless asset with rRF = 7%. Stocks A and B are uncorrelated (rAB = 0). Which of the following statements is most CORRECT? 1. b. The expected return on the investor’s portfolio will probably have an expected return that is somewhat below 10% and a standard deviation (SD) of approximately 10%. 2. d. The investor’s risk/return indifference curve will be tangent to the CML at a point where the expected return is in the range of 7% to 10%. 3. e. Since the two stocks have a zero correlation coefficient, the investor can form a riskless portfolio whose expected return is in the range of 10% to 15%. 4. a. The expected return on the investor’s portfolio will probably have an expected return that is somewhat above 15% and a standard deviation (SD) of approximately 20%. 5.…Consider a T-bill with a rate of return of 5% and the following risky securities:Security A: E(r) = 0.15; Variance = 0.04Security B: E(r) = 0.10; Variance = 0.0225Security C: E(r) = 0.12; Variance = 0.01Security D: E(r) = 0.13; Variance = 0.0625From which set of portfolios, formed with the T-bill and any one of the four risky securities, would a risk-averse investor always choose his portfolio? A. Cannot be determined. B. The set of portfolios formed with the T-bill and security B. C. The set of portfolios formed with the T-bill and security C. D. The set of portfolios formed with the T-bill and security D. E. The set of portfolios formed with the T-bill and security A.
