Two assets are the constituents of a market capitalization-weighted index. They offer the following returns in various states of the world: State 1 2 3 4 Probability 0.3 0.4 0.1 0.2 i. Asset 1 5% 2% 4% 3% Asset 2 6% 1% 4% 4% a) If Asset 1 has a market capitalization of $400 million and Asset 2 has a market capitalization of $600 million, calculate the expected return of the index ii. the standard deviation of the return of the index b) You now decide to construct a portfolio consisting of a weight of 0.7 in the index from part a) plus 0.3 in gold. Gold has an expected return of 1% and a standard deviation of return of 2%. The correlation between the returns of the index and the returns of gold is -0.2. Use matrix multiplication to find the expected return and standard deviation of your portfolio returns.

Two assets are the constituents of a market capitalization-weighted index. They offer the following returns in various states of the world: State 1 2 3 4 Probability 0.3 0.4 0.1 0.2 i. Asset 1 5% 2% 4% 3% Asset 2 6% 1% 4% 4% a) If Asset 1 has a market capitalization of $400 million and Asset 2 has a market capitalization of $600 million, calculate the expected return of the index ii. the standard deviation of the return of the index b) You now decide to construct a portfolio consisting of a weight of 0.7 in the index from part a) plus 0.3 in gold. Gold has an expected return of 1% and a standard deviation of return of 2%. The correlation between the returns of the index and the returns of gold is -0.2. Use matrix multiplication to find the expected return and standard deviation of your portfolio returns.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: RHD =-0.03+2.10RM+eHD R-squared =0.7 RML =0.06+1.60RM+eML R-squared =0.6 σM =0.15 where M is S&P/TSX Comp Index and RX is the excess return of stock X. What is the systematic risk of each stock?
Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: RHD =-0.03+2.10RM+eHD R-squared =0.7 RML =0.06+1.60RM+eML R-squared =0.6 σM =0.15 where M is S&P/TSX Comp Index and RX is the excess return of stock X. What is the systematic risk of each stock? xxxxxx
Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: RHD =-0.03+2.10RM+eHD R-squared =0.7 RML =0.06+1.60RM+eML R-squared =0.6 σM =0.15 where M is S&P/TSX Comp Index and RX is the excess return of stock X. What is the standard deviation of each stock? (Hint: βi = (ρiM σi) / σM.)
Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: RHD =-0.03+2.10RM+eHD R-squared =0.7 RML =0.06+1.60RM+eML R-squared =0.6 σM =0.15 where M is S&P/TSX Comp Index and RX is the excess return of stock X. What is the covariance and the correlation coefficient between HD and ML? For portfolio P with investment proportion of 0.4 in HD and 0.6 in ML, calculate the systematic risk, non-systematic risk, and total risk of P.
The Table above (in Q.1) shows data forTerrania and its three trading partners A,B, C. Assume that effectiveexchange rate index in year 1 equals 100,defining the index so that a highernumber means a stronger exchange ratethe value of the index in year 2 isNote: express your answer to 2 decimalplaces
AGG: A- tracks the investment results of an index composed of the total U.S. investment-grade bond market. B- provides 2x daily leveraged exposure to a market cap-weighted index of 500 large- and mid-cap US companies selected by S&P. C- tracks the Standard & Poor's (S&P) 500 Index, which comprises 500 large-cap U.S. stocks. D- bets against the Dow Jones Industrial Average.
Below are two alternative strategies under consideration by an investment fi rm:Strategy A : Invest in stocks that are components of a global equity index, have aROE above the median ROE of all stocks in the index, and have a P/E less thanthe median P/E.Strategy B : Invest in stocks that are components of a broad-based US equity index,have a ratio of price to operating cash fl ow in the lowest quartile of companies inthe index, and have shown increases in sales for at least the past three years.Both strategies were developed with the use of back-testing.1 . How would you characterize the two strategies?2 . What concerns might you have about using such strategies?
The following four macro-economic factors were identified regarding a stock As returns, the stock sensitivity to each factor and the related risk premium associated with each factor have been calculated as follows: Gross domestic product (GDP) growth=0.6 RP=4% Inflation rate= 0.8, RP=2% Platinum prices=-0.7, RP= 5% Standard and Poor’s 500 index return= 1.3 RP=9% The risk free rate is 3% Calculate the expected rate of return using the Arbitrage pricing theory formula.
The following information relates to five stocks listed in five different sectors at the Nairobi SecuritiesExchange .The return on treasury bills is 8% and the average return in the market has been found to be13%. Using the capital asset pricing model (CAPM) determine the Required Rate of Return (RRR) for eachstock and state whether it is undervalued or overvalued.
Using the data in the chart, calculate the first-period rates of return on the following indexes of the three stocks: A market-value-weighted index. An equally weighted index. stocks P0 Q0 P1 Q1 P2 Q2 A 90 100 95 100 95 100 B 50 200 45 200 45 200 C 100 200 110 200 55 400 (Pt represents price at time t, and Qt represents shares outstanding at time t.)
Suppose that the index model for two Canadian stocks HD and ML is estimated with the following results: RHD =-0.03+2.10RM+eHD R-squared =0.7 RML =0.06+1.60RM+eML R-squared =0.6 σM =0.15 where M is S&P/TSX Comp Index and RX is the excess return of stock X. What is the covariance and the correlation coefficient between HD and ML? xx
The following are annual rates of return for T-bills in Ghana and Share on the Ghana Stock exchange Year T-bill Shares on Ghana Stock Exchange2016 0.063 0.1502017 0.081 0.0432018 0.076 0.3742019 0.090 0.1922020 0.085 0.106a. Compute the arithmetic mean rate of return and standard deviation of rates of return for the two series. b. Discuss these two alternative investments in terms of their arithmetic average rates of return, their absolute risk, and their relative risk. c. Compute the geometric mean rate of return for each of these investments. Compare the arithmetic mean return and geometric mean return for each investment and discuss the difference between mean returns as related to the standard deviation of each series.

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