Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 11, Problem 28QP
Summary Introduction
To determine: The amount invested in Stock Y and the beta of the portfolio.
Introduction:
Portfolio refers to a set of financial investments owned by the investor. The portfolio of investments includes debentures, stocks, bonds, and mutual funds.
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You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 13 percent. If Stock X has an expected return of 31 perCent and a beta of 1.80, and Stock Y has an expected return of 20 percent and a beta of 1.3 .how much money will you invest in Stocky? How do you interpret your answer? What is the beta of your portfolio?
Assume that you have just received information from your investment advisor that your portfolio has reached a value of $1,250,000. Your portfolio consists of three stocks, as follows:
Stock
Amount Invested
% of Total
Beta
A
$250,000
20%
1.12
B
$400,000
32%
.85
C
$600,000
48%
.55
Total:
$1,250,000
100%
Calculate the beta of this investment portfolio.
Assume that the expected market return ( r m ) is 9 percent and the expected risk-
free rate ( RF ) is 2 percent. What is the expected return ( r j ) for this investment portfolio?
An investor wishes to construct a portfolio by borrowing 40% of his original wealth and investing all the money in a stock index. The return on the risk-free asset is 3% and the expected return on the stock index is 10%. Calculate the expected return on the portfolio.
Chapter 11 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 11.1 - How do we calculate the expected return on a...Ch. 11.1 - Prob. 11.1BCQCh. 11.2 - What is a portfolio weight?Ch. 11.2 - How do we calculate the expected return on a...Ch. 11.2 - Is there a simple relationship between the...Ch. 11.3 - Prob. 11.3ACQCh. 11.3 - Prob. 11.3BCQCh. 11.4 - Prob. 11.4ACQCh. 11.4 - Prob. 11.4BCQCh. 11.5 - Prob. 11.5ACQ
Ch. 11.5 - Prob. 11.5BCQCh. 11.5 - Prob. 11.5CCQCh. 11.5 - Prob. 11.5DCQCh. 11.6 - Prob. 11.6ACQCh. 11.6 - Prob. 11.6BCQCh. 11.6 - How do you calculate a portfolio beta?Ch. 11.6 - True or false: The expected return on a risky...Ch. 11.7 - Prob. 11.7ACQCh. 11.7 - Prob. 11.7BCQCh. 11.7 - Prob. 11.7CCQCh. 11.8 - If an investment has a positive NPV, would it plot...Ch. 11.8 - Prob. 11.8BCQCh. 11 - What does variance measure?Ch. 11 - Prob. 11.2CCh. 11 - What is the equation for total return?Ch. 11 - Prob. 11.4CCh. 11 - Prob. 11.5CCh. 11 - By definition, what is the beta of the average...Ch. 11 - Section 11.7What does the security market line...Ch. 11 - Diversifiable and Nondiversifiable Risks. In broad...Ch. 11 - Information and Market Returns. Suppose the...Ch. 11 - Systematic versus Unsystematic Risk. Classify the...Ch. 11 - Systematic versus Unsystematic Risk. Indicate...Ch. 11 - Prob. 5CTCRCh. 11 - Prob. 6CTCRCh. 11 - Prob. 7CTCRCh. 11 - Beta and CAPM. Is it possible that a risky asset...Ch. 11 - Prob. 9CTCRCh. 11 - Earnings and Stock Returns. As indicated by a...Ch. 11 - Determining Portfolio Weights. What are the...Ch. 11 - Portfolio Expected Return. You own a portfolio...Ch. 11 - Prob. 3QPCh. 11 - Prob. 4QPCh. 11 - Prob. 5QPCh. 11 - Prob. 6QPCh. 11 - Calculating Returns and Standard Deviations. Based...Ch. 11 - Prob. 8QPCh. 11 - Prob. 9QPCh. 11 - LO1, LO2 10.Returns and Standard Deviations....Ch. 11 - Calculating Portfolio Betas. You own a stock...Ch. 11 - Calculating Portfolio Betas. You own a portfolio...Ch. 11 - Using CAPM. A stock has a beta of 1.23, the...Ch. 11 - Using CAPM. A stock has an expected return of 11.4...Ch. 11 - Using CAPM. A stock has an expected return of 10.9...Ch. 11 - Prob. 16QPCh. 11 - Using CAPM. A stock has a beta of 1.23 and an...Ch. 11 - Using the SML. Asset W has an expected return of...Ch. 11 - Reward-to-Risk Ratios. Stock Y has a beta of 1.20...Ch. 11 - Prob. 20QPCh. 11 - Prob. 21QPCh. 11 - Prob. 22QPCh. 11 - Prob. 23QPCh. 11 - Calculating Portfolio Weights and Expected Return....Ch. 11 - Portfolio Returns and Deviations. Consider the...Ch. 11 - Prob. 26QPCh. 11 - Analyzing a Portfolio. You want to create a...Ch. 11 - Prob. 28QPCh. 11 - SML. Suppose you observe the following situation:...Ch. 11 - Systematic versus Unsystematic Risk. Consider the...Ch. 11 - Beta is often estimated by linear regression. A...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Assume that you’ve just inherited $500,000 and have decided to invest a big chunk of it ($350,000, to be exact) in common stocks. Your objective is to build up as much capital as you can over the next 15 to 20 years, and you’re willing to tolerate a “good deal’’ of risk. What types of stocks (blue chips, income stocks, and so on) do you think you’d be most interested in, and why? Select at least three types of stocks and briefly explain the rationale for selecting each. Would your selections change if you were dealing with a smaller amount of money—say, only $50,000? What if you were a more risk-averse investor?arrow_forwardYour client has decided that the risk of the bond portfolio is acceptable and wishes to leave it as it is. Now your client has asked you to use historical returns to estimate the standard deviation of Blandy’s stock returns. (Note: Many analysts use 4 to 5 years of monthly returns to estimate risk, and many use 52 weeks of weekly returns; some even use a year or less of daily returns. For the sake of simplicity, use Blandy’s 10 annual returns.)arrow_forwardYour client is shocked at how much risk Blandy stock has and would like to reduce the level of risk. You suggest that the client sell 25% of the Blandy stock and create a portfolio with 75% Blandy stock and 25% in the high-risk Gourmange stock. How do you suppose the client will react to replacing some of the Blandy stock with high-risk stock? Show the client what the proposed portfolio return would have been in each year of the sample. Then calculate the average return and standard deviation using the portfolios annual returns. How does the risk of this two-stock portfolio compare with the risk of the individual stocks if they were held in isolation?arrow_forward
- 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?arrow_forwardYou are considering investing $1000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 2.5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 35% and 65%, respectively. X has an expected rate of return of 21%, and Y has an expected rate of return of 9%. The dollar values of your position in X would be _________, if you decide to hold a complete portfolio that has an expected return of 11%.arrow_forwardYou are considering investing $1000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 2.5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 35% and 65%, respectively. X has an expected rate of return of 21%, and Y has an expected rate of return of 9%. The dollar values of your position in Y would be _________, if you decide to hold a complete portfolio that has an expected return of 11%. Notearrow_forward
- You are considering investing $1000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 2.5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 35% and 65%, respectively. X has an expected rate of return of 21%, and Y has an expected rate of return of 9%. The dollar values of your position in the Tbill would be _________, if you decide to hold a complete portfolio that has an expected return of 11%.arrow_forwardA portfolio consists of assets with the following expected returns (refer to image): a. What is the expected return on the portfolio if the investor spends an equal amount on each asset? b. What is the expected return on the portfolio if the investor puts 50 percent of available funds in technology stocks, 10 percent in pharmaceutical stocks, 24 percent in utility stocks, and 16 percent in the savings account?arrow_forward
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