INTERMEDIATE FINANCIAL MANAGEMENT
12th Edition
ISBN: 9781305718265
Author: Brigham
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Chapter 3, Problem 3MC
Summary Introduction
Case summary:
Person X has been recruited as the investment company of bowers & noon. One of the client did not understand the diversification value. The assignment is to identify the concern of the client by showing the client on how to respond few questions.
To plot: The attainable portfolios.
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Students have asked these similar questions
Consider two assets. Suppose that the return on asset 1 has expected value 0.05 and standard deviation 0.1 and suppose that the return on asset 2 has expected value 0.02 and standard deviation 0.05. Suppose that the asset returns have correlation 0.4.Consider a portfolio placing weight w on asset 1 and weight 1-w on asset 2; let Rp denote the return on the portfolio.
Find the mean and variance of Rp as a function of w.
2. Suppose that you have a riskfree asset and N risky assets for investment. The rate of return
on the riskfree asset is r,, while the (Nx1) vector of the rate of return on the N risky
assets is r, which is multivariate normal, i.e., r N(u, E). Your utility function for a
portfolio that consists of the riskfree asset and the N risky asset is u(r,)=r,-=o,
2
Suppose that the sum of investment proportions on the riskfree and risky assets is one.
Answer the following question.
A. What is your optimal investment proportion in the risky assets? How is your investment
on the riskfree asset affected by different values of 2?
B. Suppose that there is only one risky asset i. Show the effects of the Sharpe ratio
(4,/0, ) on the investment proportion in the risky asset.
Consider the expected return and standard deviation of the following two assets:
Asset 1: E[r1]=0.1 and σ1=0.2
Asset 2: E[r2]=0.3 and σ2=0.4
(a) Draw (e.g. with Excel) the set of achievable portfolios in mean-standard deviation
space for the cases: (i) ρ12= -1, (ii) ρ12=0.
(b) Suppose ρ12=-1. Which portfolio has the minimal variance? What is the variance and
expected return of that portfolio?
(c) Derive the formula for the variance of a portfolio with four assets.
Chapter 3 Solutions
INTERMEDIATE FINANCIAL MANAGEMENT
Ch. 3 - Security A has an expected rate of return of 6%, a...Ch. 3 - The standard deviation of stock returns for Stock...Ch. 3 - APT
An analyst has modeled the stock of Crisp...Ch. 3 - Two-Asset Portfolio
Stock A has an expected return...Ch. 3 - Prob. 4PCh. 3 - Prob. 1MCCh. 3 - Prob. 2MCCh. 3 - Prob. 3MCCh. 3 - Prob. 4MCCh. 3 - Prob. 5MC
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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 a Portfolio of two assets A and B whose standard deviations of their returns are 8.6% and 10.8% respectively, while their correlation coefficient of returns is Pas= - 0.61. You are given the right to do portfolio optimization without restrictions. What proportions would you choose and why?arrow_forwardCompute the residual risk measure for portfolio A. Round off your final answer to three digits after the decimal point. Compute the appraisal ratio for portfolio B. Round off your final answer to three digits after the decimal point.arrow_forwardThe expected rate of return of an investment ________. a. equals one of the possible rates of return for that investment b. equals the required rate of return for the investment c. is the mean value of the probability distribution of possible returns d. is the median value of the probability distribution of possible returns e. is the mode value of the probability distribution of possible returnsarrow_forward
- Suppose the utility function is U = E(r) - 0.5Ao2. Draw the indifference curve corresponding to a utility level of 0.2 for an investor with a risk aversion coefficient of 3. Please note the vertical line indicates expected return, and plot standard deviation on the horizontal line.arrow_forwardf. Assume a Portfolio of two assets A and B whose standard deviations of their returns are 8.6% and 10.8% respectively, while their correlation coefficient of returns is Pas = - 0.61. You are given the right to do portfolio optimization without restrictions. What proportions would you choose and why?arrow_forwardassume that every asset has the same expected return and variance. furthermore, all assets have the same covariance with each other. as number of assets in a portfolio grows, which becomes more important: variance or covariance? clarify your answer using words, diagrams, formulae or a practical example.arrow_forward
- What is the expected return on a two asset portfolio and what are its variance and standard deviation? Also, What is R squared?arrow_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_forwardSupposing the return from an investment has the following probability distribution Return Probability R (%) 8 0.2 10 0.2 12 0.5 14 0.1 Required: What is the expected return of the investment? What is the risk as measured by the standard deviation of expected returns?arrow_forward
- Consider a portfolio formed of two risky assets whose returns have a correlation of 0.5. What can be said of the standard deviation of the global minimum-variance portfolio formed with these two risky assets? It's greater than zero. It s equal to zero. O It s between - 1 and +1. O It's the weighted average of the standard deviations of the two risky assets.arrow_forwardWe believe that the single factor model can predict any individual asset’s realized rate of return well. Both Portfolio A and Portfolio B are well-diversified: ri = E(ri) + βiF + Ei, where E(ei) = 0 and Cov(F, i) = 0 A B β 1.2 0.8 E(r) 0.1 0.08 (1) What is the rate of return of the risk-free asset? (2) What is the expected rate of return of the well-diversified portfolio C with βC = 1.6, which also exists in the market? (3) A fund constructs a well-diversified portfolio D. Studies show that βD = 0.6. The expected rate of return of D is 0.06. Is there an arbitrage opportunity? If so, construct a trading strategy to earn profits with no risk. If not, why?arrow_forwardAn efficient portfolio is one that: Select one: a. maximises return for a given level of risk. b. maximises risk for a given level of return. c. minimises risk for a given rate of return. d. Both A and C. are efficient portfolios.arrow_forward
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Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY