INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 27, Problem 3PS
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To construct: Alpha
Introduction: A
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)If you are asked to construct your own portfolio by using information about the individual stocks in the excel spreadsheet, are there any stocks which you should not include in your portfolio? Can you provide your justifications? (You may draw performance graphs of one stock against the market portfolio).
Using the data generated in the graph, show what the information looks like in a spreadsheet.
a) Plot the Security Market Line (SML)
b) Superimpose the CAPM’s required return on the SML
c) Indicate which investments will plot on, above, and below the SML?
d) If an investment’s expected return (mean return) does not plot on the SML, what does
it show? Identify undervalued/overvalued investments from the graph.
As a portfolio manager, assume the following information: The beta of your portfolio 1.2 Your performance is exactly on target with the SML data under condition 1 Assume the true SML data is given under condition 2. Condition 1 RFR Rm(proxy) Condition 2 0.04 0.1 0.05 0.12 Rm(true) How much does your performance differ from the true SML?
Chapter 27 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
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