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EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 13, Problem 2PS
Summary Introduction
To state: Hypothesis for second-pass regression for security market line.
Introduction:The model that shows the relation between systematic risk and expected
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Answer the question:
Given the following historical returns, calculate the average return and the standard deviation:
Year
Return
1
14%
2
10%
3
15%
4
11%
a. Using the data in the table below alculate the following performance measures.i. Sharpe ratioii. Treynor measureiii. Jensen’s alphaiv. M-squared measurev. T-squared measure, andvi. Appraisal ratio (information ratio)
Fund
Average return
Standard Deviation
Beta coefficient
Unsystematic Risk
A
0.240
0.220
0.800
0.017
B
0.200
0.170
0.900
0.450
C
0.290
0.380
1.200
0.074
D
0.260
0.290
1.100
0.026
E
0.180
0.400
0.900
0.121
F
0.320
0.460
1.100
0.153
G
0.250
0.190
0.700
0.120
Market
0.220
0.180
1.000
0.000
Risk free return
0.050
0.000
b. Out of the performance measures you calculated in part a., which one would you use undereach of the following circumstances:i. You want to select one of the funds as your risky portfolio.ii. You want to select one of the funds to be mixed with the rest of your portfolio,currently composed solely of holdings in the market-index fund.iii. You want to select one of the funds to form an actively managed stock portfolio
Assuming that the rates of return associated with a given asset investment are normally distributed; that the expected return, r, is 18.7%; and that the coefficient of variation, CV, is 1.88, answer the following questions:
a. Find the standard deviation of returns,
sigma Subscript rσr.
b. Calculate the range of expected return outcomes associated with the following probabilities of occurrence: (1) 68%, (2) 95%, (3) 99%.
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- uppose the average return on Asset A is 7.1 percent and the standard deviation is 8.3 percent, and the average return and standard deviation on Asset B are 4.2 percent and 3.6 percent, respectively. Further assume that the returns are normally distributed. Use the NORMDIST function in Excel® to answer the following questions. a. What is the probability that in any given year, the return on Asset A will be greater than 12 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the probability that in any given year, the return on Asset B will be greater than 12 percent? Less than 0 percent? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. In a particular year, the return on Asset A was −4.38 percent. How likely is it that such a low return will recur at some point in the future? (Do not round…arrow_forwardAssume that you have obtained the following information for Asset A: Rate of Return Probability 5.5% 25% 7.25% 55% 11% 20% Compute the expected rate of return for Asset A, using the information provided in thechart above Assume that the standard deviation of the expected returns for Asset A is 1.87%. With information and the expected rate of return that you calculated for Asset A in Part A of this problem, compute the co-efficient of variation for Asset A.arrow_forwardThe probability distributions of expected returns for the assets are shown in the following table: Asset A Prob Return 0.2 -5% 0.4 10% 0.4 15% a) Calculate the expected return for asset A. b) Calculate the standard deviation for asset A.arrow_forward
- calculate the following Sharpe Ratio (SP) Treynor Measure Jensen Measure M2 measure T2 measure Information Ratio (appraisal ratio) Fund Average return Standard Deviation Beta coefficient Unsystematic Risk A 0.240 0.220 0.800 0.017 B 0.200 0.170 0.900 0.450 C 0.290 0.380 1.200 0.074 D 0.260 0.290 1.100 0.026 E 0.180 0.400 0.900 0.121 F 0.320 0.460 1.100 0.153 G 0.250 0.190 0.700 0.120 Market 0.220 0.180 1.000 0.000 Risk free return 0.050 0.000arrow_forwardPlease fill out the parts in the above table that are shaded in yellow. You will notice that there are nine line items Please answer : Covariance with MP Correlation with Market Index Beta CAPM Req. Returnarrow_forwardConsider the following linear regression model: (R₁-r)= a; + b(RMkt - rf) + e; The b; in the regression: O measures the deviation from the best fitting line and is zero on aver- measures the sensitivity of the security to market risk. measures the diversifiable risk in returns.arrow_forward
- The expected value, standard deviation of returns, and coefficient o below.) \table[[Asset A],[Possible Outcomes,Probability,Returns (%)arrow_forwardThe returns on assets C and D are strongly correlated with a correlation coefficient of 0.80. The variance of returns on C is 0.0009, and the variance of returns on D is 0.0036. What is the covariance of returns on C and D? Give typing answer with explanation and conclusionarrow_forwardThe standard deviation of return on investment a is 0.10, while the standard deviation of return on investment b is 0.04. If the correlation coefficient between the returns on A and B is_____________. A. -0.0447 B. -0.0020 C. 0.0020 D. 0.0447arrow_forward
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