CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196246
Author: Bodie
Publisher: MCG
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Chapter 5, Problem 14PS
For Problems 12-16, assume that you manage a risky portfolio with an expected
14. Suppose the same client as in the previous problem prefers to invest in your portfolio a proportion (y) that maximizes the expected return on the overall portfolio subject to the constraint that the overall portfolio’s standard deviation will not exceed 20%. (LO 5-3)
a. What is the investment proportion, y?
b. What is the expected rate of return on the overall portfolio?
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9.
Suppose you plan to form your overall investment portfolio in two steps:
STEP 1: Choose a portfolio of stocks with a zero position in the risk-free asset.
STEP 2: Allocate your money between the portfolio from Step 1 and the risk-free asset.
Suppose you can borrow and lend as much as you want at the risk-free rate in Step 2.
Let Erp be the expected return of the Step 1 portfolio.
Let Var(rp) be the variance of the return of the Step 1 portfolio. Let rf be the risk-free rate.
How will you form the Step 1 Portfolio?
Set the Step 1 portfolio to maximize Erp
SettheStep1portfoliotominimizeVar(rp)
Set the Step 1 portfolio to maximize Erp - Var(rp)
Set the Step 1 portfolio to maximize the ratio Erp/Var(rp)
Set the Step 1 portfolio to maximize the ratio (Erp- rf)/Var(rp)
None of the above.
A financial advisor is offering you a product with an expected return of 8% and a return standard deviation of 12%. Is this an efficient
investment if the risk-free rate is 1%, the market return is 14%, and the market volatility is 22%?
Select one:
O a. The offered portfolio is more efficient than an optimal portfolio
Ob. The offered portfolio is less efficient than an optimal portfolio
O. The offered portfolio is less volatile but offers a higher return than an optimal portfolio
O d. We cannot state whether the offered portfolio is less efficient than an optimal portfolio
The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standarddeviation of 20%. Answer the following questions.a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition ofA to make the investors prefer the optimal risky portfolio than the risk free asset?
b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expectedreturn and standard deviation of the investor’s optimal complete portfolio?
Chapter 5 Solutions
CONNECT WITH LEARNSMART FOR BODIE: ESSE
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Ch. 5 - Consider a risky portfolio. The end-of-year cash...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - Prob. 17PSCh. 5 - You manage an equity fund with an expected risk...Ch. 5 - What is the reward-to--volatility (Sharpe) ratio...Ch. 5 - A portfolio of nondividend-paying stocks earned a...Ch. 5 - Which of the following statements about the...Ch. 5 - Which of the following statements reflects the...Ch. 5 - Use the following data in answering CFA Questions...Ch. 5 - Prob. 5CPCh. 5 - Lise the following data in answerifng CFA Question...Ch. 5 - Use the following scenario analysis for stocks X...Ch. 5 - Prob. 8CPCh. 5 - Use the following scenario analysis for stocks X...Ch. 5 - 10. Probabilities for three states of the economy...Ch. 5 - 11. An analyst estimates that a stock has the...Ch. 5 - Prob. 1WMCh. 5 - Prob. 2WMCh. 5 - Prob. 3WM
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