FUND CORP FIN+CONNECTPLUS(LL) >CUSTOM<
11th Edition
ISBN: 9781259699481
Author: Ross
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 13, Problem 24QP
Analyzing a Portfolio [LO2, 4] You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table:
Asset | Investment | Beta |
Stock A | $185,000 | .80 |
Stock B | $320,000 | 1.13 |
Stock C | 1.29 | |
Risk-free asset |
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
A4 a.
Suppose we have two risky assets, Stock I and Stock J, and a risk-free asset. Stock I has an expected return of 25% and a beta of 1.5. Stock J has an expected return of 20% and a beta of 0.8. The risk-free asset’s return is 5%.
a. Calculate the expected returns and betas on portfolios with x% invested in Stock I and the rest invested in the risk-free asset, where x% = 0%, 50%, 100%, and 150%.
7. Portfolio Risk and Return. Suppose that the S&P 500, with a beta of 1.0, has an expected return of 10% and T-bills provide a risk-free return of 4%. (LO12-1)
How would you construct a portfolio from these two assets with an expected return of 8%? Specifically, what will be the weights in the S&P 500 versus T-bills?
How would you construct a portfolio from these two assets with a beta of .4?
Find the risk premiums of the portfolios in parts (a) and (b), and show that they are proportional to their betas.
2. You have been managing a $5 million portfolio that has a beta of 1.35 and a required rate of return of 15.475%. The current risk-free rate is 4%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 1.05, what will be the required return on your $5.5 million portfolio? Do not round intermediate calculations. Round your answer to two decimal places.
Chapter 13 Solutions
FUND CORP FIN+CONNECTPLUS(LL) >CUSTOM<
Ch. 13.1 - How do we calculate the expected return on a...Ch. 13.1 - In words, how do we calculate the variance of the...Ch. 13.2 - What is a portfolio weight?Ch. 13.2 - How do we calculate the expected return on a...Ch. 13.2 - Is there a simple relationship between the...Ch. 13.3 - What are the two basic parts of a return?Ch. 13.3 - Under what conditions will a companys announcement...Ch. 13.4 - Prob. 13.4ACQCh. 13.4 - Prob. 13.4BCQCh. 13.5 - What happens to the standard deviation of return...
Ch. 13.5 - What is the principle of diversification?Ch. 13.5 - Why is some risk diversifiable? Why is some risk...Ch. 13.5 - Why cant systematic risk be diversified away?Ch. 13.6 - Prob. 13.6ACQCh. 13.6 - What does a beta coefficient measure?Ch. 13.6 - True or false: The expected return on a risky...Ch. 13.6 - How do you calculate a portfolio beta?Ch. 13.7 - Prob. 13.7ACQCh. 13.7 - What is the security market line? Why must all...Ch. 13.7 - Prob. 13.7CCQCh. 13.8 - If an investment has a positive NPV, would it plot...Ch. 13.8 - What is meant by the term cost of capital?Ch. 13 - Prob. 13.1CTFCh. 13 - Prob. 13.5CTFCh. 13 - Beta is a measure of what?Ch. 13 - The slope of the security market line is equal to...Ch. 13 - Where would a negative net present value project...Ch. 13 - Prob. 1CRCTCh. 13 - Prob. 2CRCTCh. 13 - Systematic versus Unsystematic Risk [LO3] Classify...Ch. 13 - Systematic versus Unsystematic Risk [LO3] Indicate...Ch. 13 - Prob. 5CRCTCh. 13 - Diversification [LO2] True or false: The most...Ch. 13 - Portfolio Risk [LO2] If a portfolio has a positive...Ch. 13 - Beta and CAPM[LO4] Is it possible that a risky...Ch. 13 - Corporate Downsizing [LO1] In recent years, it has...Ch. 13 - Earnings and Stock Returns [LO1] As indicated by a...Ch. 13 - Determining Portfolio Weights [LO1] What are the...Ch. 13 - Portfolio Expected Return [LO1] You own a...Ch. 13 - Portfolio Expected Return [LO1] You own a...Ch. 13 - Prob. 4QPCh. 13 - Prob. 5QPCh. 13 - Prob. 6QPCh. 13 - Calculating Returns and Standard Deviations [LO1]...Ch. 13 - Calculating Expected Returns [LO1] A portfolio is...Ch. 13 - Returns and Variances [LO1] Consider the following...Ch. 13 - Returns and Standard Deviations [LO1] Consider the...Ch. 13 - Calculating Portfolio Betas [LO4] You own a stock...Ch. 13 - Calculating Portfolio Betas [LO4] You own a...Ch. 13 - Using CAPM[LO4] A stock has a beta of 1.15, the...Ch. 13 - Using CAPM[LO4] A stock has an expected return of...Ch. 13 - Using CAPM [LO4] A stock has an expected return of...Ch. 13 - Using CAPM [LO4] A stock has an expected return of...Ch. 13 - Using the SML[LO4] Asset W has an expected return...Ch. 13 - Reward-to-Risk Ratios [LO4] Stock Y has a beta of...Ch. 13 - Reward-to-Risk Ratios [LO4] In the previous...Ch. 13 - Using CAPM [LO4] A stock has a beta of 1.14 and an...Ch. 13 - Portfolio Returns [LO2] Using information from the...Ch. 13 - Prob. 22QPCh. 13 - Portfolio Returns and Deviations [LO2] Consider...Ch. 13 - Analyzing a Portfolio [LO2, 4] You want to create...Ch. 13 - Analyzing a Portfolio [LO2, 4] You have 100,000 to...Ch. 13 - Systematic versus Unsystematic Risk [LO3] Consider...Ch. 13 - SML [LO4] Suppose you observe the following...Ch. 13 - SML [LO4] Suppose you observe the following...Ch. 13 - Prob. 1MCh. 13 - Beta is often estimated by linear regression. A...Ch. 13 - Prob. 3MCh. 13 - Prob. 4MCh. 13 - Prob. 5M
Knowledge Booster
Learn more about
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
- You want to create a portfolio equally as risky as the market, and you have $1,200,000 to invest. Consider the following information: Asset Investment Beta Stock A $300,000 0.70 Stock B $360,000 1.25 Stock C 1.55 Risk-free asset Required: (a) What is the investment in Stock C? (Do not round your intermediate calculations.) (b) What is the investment in risk-free asset? (Do not round your intermediate calculations.)arrow_forwardCAPM The Treasury bill rate is 4%, and the expected return on the market portfolio is 12%. Using the capital asset pricing model: Draw a graph similar to show how the expected return varies with beta. What is the risk premium on the market? What is the required return on an investment with a beta of 1.5? If an investment with a beta of .8 offers an expected return of 9.8%, does it have a positive NPV? If the market expects a return of 11.2% from stock X, what is its beta?arrow_forwardou want to create a portfolio equally as risky as the market, and you have $900,000 to invest. Consider the following information: Asset Investment Beta Stock A $135,000 0.65 Stock B $270,000 1.35 Stock C 1.50 Risk-free asset Required: (a) What is the investment in Stock C? (Do not round your intermediate calculations.) (Click to select) $298,500 $167,500 $310,440 $283,575 $286,560 (b) What is the investment in risk-free asset? (Do not round your intermediate calculations.) (Click to select) $196,500 $188,640 $204,360 $327,500 $186,675arrow_forward
- You own a portfolio that has a total value of $150,000 and a beta of 1.32. You have another $61,000 to invest and you would like the beta of your portfolio to decrease to 1.25. What does the beta of the new investment have to be in order to accomplish this? Multiple Choice 1.078 1.138 1.199 1.285 .943arrow_forwardSuppose you have the following investments: Security Amount Invested Expected Return Beta A $2,000 5% .80 B $4,000 10% .95 C $6,000 15% 1.10 D $8,000 18% 1.40 What is the expected return on this portfolio? Select one: a. 15.2% b. 16.4% c. 14.2% d. 14.9%arrow_forward2C) Assume that the CAPM holds in the economy. The following data is available about the market portfolio, the riskless rate, and two risky assets, W and X: The market portfolio has a standard deviation equals to 10%, stock W has an expected return equals to 16%, standard deviation equals to 12%, and beta equals to one, stock X has a standard deviation equals to 6% and beta equals to 0.7. The risk-free rate is 3%. What is the expected return and the beta of the market portfolio? What is the expected return on asset X? Does asset W lie on the Capital Market Line? Explain why or why not. Suppose you invested $100,000 in these two stocks. The beta of your portfolio is 1.25. How much did you invest in each stock? What is the expected return of this portfolio?arrow_forward
- Suppose you are the money manager of a P4.0 investment portfolio consists of stocks with the following investment and betas: Stock Beta S 1.5 T (0.50) A 1.25 R 0.75 If the market required return is 14% and the risk free rate is 6%,a) What is the portfolio beta?b) What is the portfolio required rate of return?arrow_forwardN2 10. There is a risky portfolio of multiple stocks with an expected return of 14% and a standard deviation of 21%. Jason invests 65% of his total wealth on this risky portfolio and the rest 35% on Treasury bills (so, he has constructed a ‘complete portfolio’ of a risky asset and a risk-free asset). One-year T-bill rate is 3%. a. Calculate the expected return and standard deviation of his complete portfolio b. Calculate his risk premium of the risky portfolio as well as of the complete portfolio c. Compute the Sharpe ratio d. Draw the capital allocation linearrow_forwardKF2. --Suppose the return on the market is expected to be 13%, a stock has a beta of 1.3, and the T-bill rate is 4%. You believe your portfolio will achieve an 18% return. *Briefly describe the value of Alpha you generated insofar as it relates to performance measurement and the Security Market Linearrow_forward
- 4. You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index, yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active port- folio with expected return 18% and standard deviation 28%. The risk-free rate is 8%. a) Calculate and interpret the return of the P* portfolio b) Draw the CML and your funds’ CAL on an expected return–standard deviation diagram. c) Explain in one short paragraph the advantage/disadvantage of your P* over the passive fund. d) Your client ponders whether to switch the 70%of his wealth to the passive portfolio. Explain to your client the disadvantage/advantage of the switch.arrow_forwardYou have $19,878 to invest in a stock portfolio. Your choices are Stock "X" with an expected return of 12.5% and Stock Y with an expected return of 8.24%. If your goal is to create a portfolio with an expected return of 11.92%, how much money will you invest in Stock X? State of Economy Probability of State of Economy Return Stock A Return Stock B Return Stock C Boom 0.20 19.41% 20.65% 29.51% Good 0.35 8.08% 10.59% 13.88% Poor 0.40 5.53% 3.23% 5.04% Bust 0.05 1.77% 1.47% 1.16% Your portfolio is invested 23% each in stock A and C and the remaining in stock B. What is the expected return of the portfolio? NOTE: Enter the PERCENTAGE number rounding to two decimals. If your decimal answer is 0.034576, your answer must be 3.46. DO NOT USE the % sign A Stock has a beta of 1, the expected return on the market is 17.72%, and the risk-free rate is 4.85%. What must the expected return on this stock be? NOTE: Enter the PERCENTAGE number rounding to two…arrow_forwardThe investor has R50,000 to invest A, B and C. R12,000 will be invested into asset A. The beta for asset A and asset B is 0.90 and 1.2 respectively. Asset C represents the risk-free asset. If the investor envisages a portfolio equally as risky as the market, how much should be invested into asset B? A. 32677 B. 32676 C. 32667 D. 32678arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Investing For Beginners (Stock Market); Author: Daniel Pronk;https://www.youtube.com/watch?v=6Jkdpgc407M;License: Standard Youtube License