ESSEN OF INVESTMENTS CONNECT AC
11th Edition
ISBN: 9781266650314
Author: Bodie
Publisher: MCG
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Textbook Question
Chapter 5, Problem 8PS
a. Suppose you
b. What value of A is consistent with a risk premium of 9%?
c. What will happen to the risk premium if investors become more risk tolerant? (LO 5-4)
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Suppose the SML has a risk-free rate of 5% and an expected market return of 15%. Now suppose that the SML shifts, changing slope, so that kRF is still 5% but kM is now 16%. What does this shift suggest about investors’ risk aversion? If the slope were to change downward, what would that suggest?
2C)
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?
a. Calculate the required rate of return for an asset that has a beta of
1.19,
given a risk-free rate of
2.7%
and a market return of
8.9%.
b. If investors have become more risk-averse due to recent geopolitical events, and the market return rises to
12.1%,
what is the required rate of return for the same asset?
Chapter 5 Solutions
ESSEN OF INVESTMENTS CONNECT AC
Ch. 5 - Prob. 1PSCh. 5 - The real interest rate approximately equals the...Ch. 5 - When estimating a Sharpe ratio, would it make...Ch. 5 - You’ve just decided upon your capital allocation...Ch. 5 - Prob. 5PSCh. 5 - The stock of Business Adventures sells for $40 a...Ch. 5 - Prob. 7PSCh. 5 - a. Suppose you forecast that the standard...Ch. 5 - Using the historical risk premiums as your guide,...Ch. 5 - What has been the historical average real rate of...
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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- Assume that the risk-free rate, RF, is currently 8%, the market return, RM, is 12%, and asset A has a beta, of 1.10. (could be done on word document or excel). Draw the security market line (SML) Use the CAPM to calculate the required return, on asset A. Assume that as a result of recent events, investors have become more risk averse, causing the market return to rise by 2%, to be14%. Ignoring the shift in part c, draw the new SML on the same set of axes that you used before, and calculate and show the new required return for asset A.arrow_forward4. Suppose portfolio P's expected return in 12%, its volatility (standard deviation) is 20%, and the risk-free rate is 5%. Suppose further that a particular mix of asset i and P yields a portfolio P’with an expected return of 18% and a volatility of 30%. a. Compute for the Sharpe ratio of P. b. Compute for the Sharpe ratio of P'. Is adding asset i beneficial? Explain.arrow_forwardAssume that you are given the following historical returns for the Market and Security J. Also assume that the expected risk-free rate for the coming year is 4.0 percent, while the expected market risk premium is 15.0 percent. Given this information, determine the required rate of return for Security J for the coming year, using CAPM. Year 1 2 O21.20% 3 4 5 6 O22.34% O 23.49% O24.63% O24.10% Market 10.00% 12.00% 16.00% 14.00% 12.00% 10.00% Security J 12.00% 14.00% 18.00% 22.00% 18.00% 14.00%arrow_forward
- 4. Suppose the risk-free rate is 5%, and the average investor has a risk-aversion coefficient of, and the standard deviation of the market portfolio is 20%. A. What is the expected return on the market portfolio? B. Suppose we estimate the beta of Delta as. Based on the CAPM's expected return-beta relationship, what is the expected rate of return on Delta? C. Suppose Delta is considering a new airline route and it forecasts an internal rate of return of 11% on the investment. Based on the estimated expected return on Delta in Question B, do you have to accept or reject the new project as a financial manager?arrow_forward8. Suppose security X achieves 20% return with half chance and -10% return with half chance. (a) What is the expected return of X? What is the risk (return volatility) of X? (b) Suppose security Y achieves 22% return with 55% chance and -8% return with 45% chance. Suppose you like return and dislike risk (just like all investors). Suppose you can only invest in one of the two securities. Which security (X or Y) would you choose, and why?arrow_forwardSuppose the CAPM holds. You know that the average investor has a degree of risk aversion of 4.4. The current risk-free rate is 2.2%, inflation is estimated at 1.6%, and the volatility of the market is 14%. What is the market risk premium?arrow_forward
- a) Suppose the risk-free rate is 1% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your resultsarrow_forwardA. You are told that the expected return of the market portfolio is 10%, and its standard deviation is 10%. There exists a risk-free asset in the economy. You hold an efficient portfolio with an expected return of 12% and a standard deviation of 15%. [hint: The efficient portfolio is a combination of the market portfolio and the risk-free asset.](1) In forming this efficient portfolio do you borrow or lend? Support your answer with relevant calculations.arrow_forward1. Given the following summary statistics, Mean S.D. 1.235 0.997 Asset A 0.52 Asset B. 0.44 (a) If the correlation between the two financial series is 0.25. What are the optimal portfolio weights to minimize risk? (b) What are the expected return and standard deviation of the optimal port- folio? (c) Compute the 1% Value-at-Risk for the next 5 days (d) Compute the expected shortfallarrow_forward
- “In investing, risk and return are highly correlated. Increased potential returnson investment usually go hand-in-hand with increased risk”. Critically evaluatethe above statement.ii A Financial Analyst is analyzing two investment alternatives Y and Z. Theirrates of returns under different probabilities are as follows.Probability Rate of ReturnY Z0.2 22% 5%0.6 14% 15%0.2 -4% 25%a. For Y and Z, calculate expected return, variance and standard deviation.b. Calculate the coefficient of variation for both stocks.c. If you are an investor, which company you would select for theinvestment.arrow_forwardSecurity A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of −0.25, and a beta coefficient of −0.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of 0.75, and a beta coefficient of 0.5. Which security is more risky? Why?arrow_forwardYou have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?arrow_forward
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