This question assumes the standard mean-variance utility function. You are investing in the S&P500 index, along with U.S. Treasury bills. Your risk-aversion is 8. Treasury bills will earn you a return of 6.40%, with no risk associated with them. The S&P500 has volatility 32.70%, but earns a more attractive expected return of 8.90%. What percentage of your wealth should you allocate to Treasury bills?

This question assumes the standard mean-variance utility function. You are investing in the S&P500 index, along with U.S. Treasury bills. Your risk-aversion is 8. Treasury bills will earn you a return of 6.40%, with no risk associated with them. The S&P500 has volatility 32.70%, but earns a more attractive expected return of 8.90%. What percentage of your wealth should you allocate to Treasury bills?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 3Q: Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation...

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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?
Calculate the correlation coefficient between Blandy and the market. Use this and the previously calculated (or given) standard deviations of Blandy and the market to estimate Blandy’s beta. Does Blandy contribute more or less risk to a well-diversified portfolio than does the average stock? Use the SML to estimate Blandy’s required return.
An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
This question assumes the standard mean-variance utility function. You are allocating your investments between a the NZX50 and a holding of (New Zealand) T-bills. The expected return on the NZX50 is 7.50%, with volatility 12.80%. In contrast, there is no risk investing in T-bills, and they will earn you a return of 4.70%. Your risk-aversion is 7. What percentage of your wealth should you allocate to Treasury bills? 34.61% 96.88% 96.51% 75.59%
Consider an economy where Capital Asset Pricing Model holds. In this economy, stocks A and B have the following characteristics: Stock A has and expected return of 22% and a beta of 2. Stock B has an expected return of 15% and a beta of 0.8. The standard deviation of the market portfolio’s return is 18%. Q: Assuming that stocks A and B are correctly priced according to the CAPM, compute the risk-free rate and the market risk premium.
Assume the CAPM holds and consider stock X, which has a return variance of 0.09 and a correlation of 0.75 with the market portfolio. The market portfolio's Sharpe ratio is 0.30 and the the risk-free rate is 5%. (a) What is Stock X's expected return? (b) What proportion of Stock X's return volatility (i.e. standard deviation) is priced by the market? Explain why this number is less than 1.
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You are considering investing $1,000 in a T-bill that pays 0.05 and a risky portfolio, P, constructed with two risky securities, X and Y. The weights of X and Y in P are 0.60 and 0.40, respectively. X has an expected rate of return of 0.14 and variance of 0.01, and Y has an expected rate of return of 0.10 and a variance of 0.0081.What would be the dollar values of your positions in X and Y, respectively, if you decide to hold 40% of your money in the risky portfolio and 60% in T-bills? A. $100; $240 B. $360; $240 C. $240; $160 D. Cannot be determined. E. $240; $360
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