The return on stock Ais.13 ir the economy is good and 01 if the economy is bad. The return on stock B is .09 if the economy is good and.05 if it is bad. The probability of a good economy is 50% and the probability of a bad economy is also 50%. Find the standard deviation for a portfolio invested 75% in A and 25% in B. O.04 O 05 O.06 O 07
Q: An insurance policy sells for $1200. Based on past data, an average of 1 in 125 policyholders will…
A: Profit is the income earned after all the deductions of expenses from the total revenues of the…
Q: Assume that two investment opportunities have identical expected values of $100,000. Investment A…
A: Given, E(A) = E(B) = 100,000
Q: Jen is choosing a portfolio. For this choice, she is an expected utility maximizer. We fix the…
A: Wants satisfying of the commodity is known as utility , higher the utility higher the satisfaction ,…
Q: which one is correct? QUESTION 12 Exhibit 6B.1 USE THE INFORMATION BELOW FOR THE FOLLOWING…
A: W1 = [E(σ1)2 − r1.2 E(σ1) E(σ2)]/[E(σ1)2 + E(σ2)2 − 2 r1.2 E(σ1) E(σ2)] when, r1.2 = -1 W1 = E(σ1)2…
Q: Q2. (i) Consider a risk averse investor who must decide how much of his initial wealth w to put into…
A: Decreasing absolute risk aversion represents that when wealth increases the amount invested in risky…
Q: ABC Co. is considering a new consumer product. They believe there is a probability with a…
A: A payoff matrix shows the possible outcomes for a player by choosing various strategies available to…
Q: The Hotel California faces a risk that it will suffer a fire causing a $200 million loss with a…
A: (a) The Hotel California faces a risk that it will suffer a fire causing a $200 million loss with a…
Q: Two stocks are available. The corresponding expectedrates of return are r¯1 and r¯2; the…
A: According to the above Question we have to find out minimum variance and the mean rate of return of…
Q: Is co-variance a measure of relative risk, or absolute risk? A relative risk, because it is linked…
A: The measure that depicts the relative risk of security with respect to other securities that tend to…
Q: Questions 18 through 20 refer to the following information: Shawn's consumption is subject to risk.…
A: Expected utility (EU) is a very useful concept used in game theory, finance and economics. It is…
Q: Suppose that all investors have the disposition effect. A new stock has just been issued at a price…
A: Given, Stock issued at a price of $50 A year later the stock will be take over price will be : $60…
Q: The expected return on Stock X is 9.5%, the standard deviation of expected returns is 30%, and the…
A: There are two sorts of stocks: ordinary and preferred. The distinction is that whereas the owner of…
Q: Define Expected Shortfall (ES), which is also called "Conditional Value at Risk "Expected Tail…
A: Conditional Value at Risk (CVaR), otherwise called the expected shortfall.
Q: An art dealer owns a painting worth $1,600,000, and this dealer has an expected utility function…
A: The highest price a person is willing to pay for insurance is the price at which a person is…
Q: (c) Construct risk-neutral probabilitiès för and verify the risk-neutral value for the call option…
A: I have used formula which is given in the following step for finding answers.
Q: The value of Jon’s stock portfolio is given by the function v(t) = 50 + 77t + 3t2, where v is the…
A: The value of Jon’s stock portfolio is given by the function v(t) = 50 + 77t + 3t2,
Q: Given the following information, what is the standard deviation of the returns on a portfolio that…
A: According to the given information:
Q: a. Consider the symmetric information case. Will the bond be issued? b. Consider the asymmetric…
A: Symmetric information means all parties will know the relevant information which is required for…
Q: 2. Consider a trader with initial fund given by To holding q shares of stock i is C(q) = 10 + q².…
A: Introduction initial fund has given 15 and the transaction cost of the traders has given as C(q) =…
Q: Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into…
A: In the analysis of a portfolio, to understand how much risk is actually involved in this investment,…
Q: The beta of an active portfolio is 1.45. The standard deviation of the returns on the market inde is…
A: Answer; Option (e) is Correct
Q: Mrs Gomez has a portfolio with an expected return of 7%. The portfolio is evenly invested in a stock…
A: The expected return is the profit or loss that an investor anticipates on an investment that has…
Q: Suppose the risk-free interest rate is 3%, and the stock market will retum either + 25% or -21% each…
A: Given: Risk free rate=3% Equally likely returns= +25% or -21% Returns in 2 years would either be:…
Q: The risk premium for an investment: a. Is negative for U.S. Treasury Securities b. Is zero (0) for…
A: When an individual makes an investment in the market, he has to deal with various business terms…
Q: Suppose that the probability of low demand is 0.75. (a) What is the maximum Expected Monetary…
A: The law of demand is a basic rule of economics that states that at a higher price consumers will…
Q: Consider the expected return and standard deviation of the following two assets: Asset 1:…
A: Using the Excel
Q: 1) company. If the company does well, the investor will make a 200% profit in her investment, but if…
A: Profitability: Profitability is the basic objective of all commercial endeavors. The firm will not…
Q: Using the Utility Function in Portfolio Management, where the utility function is the constant…
A: The certainty equivalent is a return that is assured and somebody would prefer to receive now over…
Q: Suppose Real Option Inc. has a product that generates the following cash flow. At t=1, the demand…
A: We are going to use Present value of cash flow methodology to answer this question. Note: As per the…
Q: Monty Burns, the owner of the Springfield Nuclear Power Plant, owns many real estate properties. His…
A: Monty's Utility function : U(a) = w0.5 Miss b utility function : U(b) = y (where , y = income )…
Q: A company owns an asset that is worth $245,000 and there is a 6% chance that it will lose $185,000…
A: In economics, utility means pleasure or satisfaction that customers get from using a product or…
Q: A risk-averse investor will: a. Always accept a greater risk with a greater expected return b. Only…
A: Risk-averse people are those who prefer not to take any risk or want to reduce the uncertainty.
Q: Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into…
A: Standard deviation: It means a measure of how spread out numbers are
Q: The beta of an active portfolio is 1.45. The standard deviation of the returns on the market inde>…
A: here calculating the standard deviation of the returns on the active portfolio as follow
Q: Consider an investor with initial wealth Yo: who maximizes his expected utility from final wealth,…
A: Utility function : u(y) = log(y) There are two risky securities to invest in 1 & 2. With returns…
Q: INV 1 4c You have invested in a portfolio of 60% in risky assets (Portfolio R) and 40% in T-bills.…
A: Risk aversion is the propensity of individuals to lean toward results with low vulnerability to…
Q: Eunice, the industry analyst of H&M, wants to determine the propensity of Major Clothing companies…
A: Propensity to risk refers to the nature of the agent to react to risky outcomes . Simply said it is…
Q: There are two portfolios available: A: Get $4 for sure B: 70% gaining $10 and 30% losing $10. The…
A: Here, it is given that the individual is risk neutral, which implies that if expected value of risky…
Q: Monty Burns, the owner of the Springfield Nuclear Power Plant, owns many real estate properties. His…
A: Monty's Utility function : U(a) = w0.5 Miss b utility function : U(b) = y (where , y = income )…
Q: A risk-averse investor will: Answer a. Always accept a greater risk with a greater expected return…
A: Risk-averse describes investors who choose preservations of capital over the potential for a…
Q: A maximizing investor with preferences u(u, ơ) = 0.2µ – 0.50^2 will allocate a portfolio worth 4000…
A:
Q: If the market risk decreases, while everything else stays the same, then Select one: O A. the budget…
A: If the market risk decreases, while everything else stays the same, then A) the budget line of the…
Q: risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth…
A: Here, we calculate the given as follow;
Q: Stewart will have a total wealth of $12,000 this year, if he stays healthy. Suppose Stewart has a…
A: Introduction Total wealth of Stewart is $12,000. If he remains healthy then his wealth will be…
Q: Suppose XYZ Corporation's stock price rises or falls with equal probability by $25 each month,…
A: A stock refers to a financial instrument that represents the ownership share in a firm.This allows…
Q: Mrs Gomez has a portfolio with an expected return of 7%. The portfolio is evenly invested in a stock…
A: The expected return is the profit or loss that an investor anticipates on an investment that has…
Step by step
Solved in 3 steps
- If the economy booms, Meyer&Co. stock will have a return of 20.8 percent. If the economy goes into a recession, the stock will have a loss of 13.1 percent. The probability of a boom is 63 percent while the probability of a recession is 37 percent. What is the standard deviation of the returns on the stock? 9.29% 12.43% 13.56% 14.61% 14.61%Two stocks are available. The corresponding expectedrates of return are r¯1 and r¯2; the corresponding variances and covariances areσ12, σ22, and σ12. What percentages of total investment should be invested ineach of the two stocks to minimize the total variance of the rate of return ofthe resulting portfolio? What is the mean rate of return of this portfolio?A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond, and the third is a T-bill money market fund that yields a rate of 8%. The mean and the standard deviation of the risky funds is as follows: Expected Return Standard Deviation Stock fund (S) 20% 30% Bond fund (B) 12% 15% The correlation between the fund returns is 0.10. Your client’s degree of risk aversion is A = 3.5. Given the utility function: U = E(r) - 1/2 A Sigma^2 What proportion, y, of the total investment should be invested in the tangency portfolio so that your client can maximize his/her expected utility? What is the expected value and standard deviation of the rate of return on your client’s optimized portfolio?
- Exercise 3: Risky Investment Charlie has von Neumann-Morgenstern utility function u(x) = ln x and has wealth W = 250, 000. She is offered the opportunity to purchase a risky project for price P = 160, 000. 1 1 With probability p = 2 the project will be a success and return V > 160, 000. With probability 1 −p = 2 the project will fail and be worthless (i.e. it returns 0). For simplicity assume there is no interest between the time of the investment and the time of its return, that is r = 0 . How large must V be in order for Charlie to want to purchase the risky project? [Hint: What is Charlie’s expected utility is she does not purchase the project? What is Charlie’s expected utility is she purchases the project?]You plan to invest $1,000 in a corporate bond fund or in a common stock fund. The following table represents the annual return (per $1,000) of each of these investments under various economic conditions and the probability that each of those economic conditions will occur. Compute the expected return for the corporate bond and for the common stock fund. Show your calculations on excel for expected returns. Compute the standard deviation for the corporate bond fund and for the common stock fund. Would you invest in the corporate bond fund or the common stock fund? Explain. If choose to invest in the common stock fund and in (c), what do you think about the possibility of losing $999 of every $1,000 invested if there is depression. Explain.A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free Treasury bills. Show how each of the following events will affect the investor’s budget line and proportion of stocks in her portfolio: A. The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same. B. The expected return on the stock market increases, but the standard deviation of the stock market remains the same. C. The return on risk-free Treasury bills increases.
- You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald’s or a Penn Station East Coast Subs franchise. McDonald’s indicates that, based on the location where you are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent probability that profits will be −$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent probability, and −$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of these two investment opportunities, which is the better investment? Explain carefully.The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions. Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset?An investor considers investing $17,000 in the stock market. He believes that the probability is 0.22 that the economy will improve, 0.42 that it will stay the same, and 0.36 that it will deteriorate. Further, if the economy improves, he expects his investment to grow to $23,000, but it can also go down to $11,000 if the economy deteriorates. If the economy stays the same, his investment will stay at $17,000. What is the expected value of his investment?
- Portfolio ABZ has a daily expected return of 0.0634% and a daily standard deviation of 1.1213%. Assuming that the daily 5 percent parametric VaR is $6 million, calculate the annual 5 percent parametric VaR for a portfolio with a market value of $ 120 million. (Assume 250 trading days in a year and give your answer in Dollars)Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B? (see attached chart)John has an investment budget of £20,000. In addition, he has borrowed £10,000 at a fixed interest rate of 5%. He decides to invest all available funds in a portfolio of equities which has an expected rate of return of 12% and standard deviation of 20%. What is the standard deviation of the return on John’s overall investment portfolio?