Adequate information: Risk-free Asset E(rp)=11% s p =15% r f =5% Expected rate of return or complete portfolio=8% To compute: The proportion of investment in the risky portfolio (P) along with the proportion of risk-free asset. Introduction: Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows: E ( r c ) = [ r f + y × ( E ( r p − r f ) ) ] Where E(r c )= Expected return of the portfolio r f =Risk free rate y=Proportion invested E(r p )=Expected return of the risky portfolio Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

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Answer 1

Question

Chapter 6, Problem 21PS

a

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The proportion of investment in the risky portfolio (P) along with the proportion of risk-free asset.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

b

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviation of the rate of return related to client’s portfolio.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

c

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviations of another client with the condition that limit does not cross more than 12% and compare the risk aversion of both the clients.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

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Consider the following information about a risky portfolio that youmanage, and a risk-free asset: E(rP ) = 11%, σP = 15%, rf = 5%.a) Your client wants to invest a proportion of her total investment budget in your riskyfund to provide an expected rate of return on her overall or complete portfolio equal to8%. What proportion should she invest in the risky portfolio, P, and what proportionin the risk-free asset? b) What will be the standard deviation of the rate of return on her portfolio? c) Another client wants the highest return possible subject to the constraint that you limithis standard deviation to be no more than 12%. Which client is more risk averse?

Give typing answer with explanation and conclusion Assume that your client would prefer to invest her entire wealth into a portfolio with an annual risk premium of 6% and a standard deviation of 12%. You have constructed a risky portfolio with an expected return of 10% and a standard deviation of 15%. T-Bills are currently yielding 4%. What is the optimal allocation, y, to the risky portfolio given your client's risk preferences? What is the expected return and standard deviation on your client's optimal complete portfolio?

If your portfolio includes 35 percent of X, 40 percent of Y and 25 percent of Z, answer the following questions: (a) Calculate the portfolio expected return. (b) Calculate the variance and the standard deviation of the portfolio. (c) If the expected T-bill rate is 3.80 percent, calculate the expected risk premium on the portfolio. (d) If the market index fund has the same expected return as your portfolio, without considering any transaction cost, would you consider selling your portfolio and investing the market index fund instead? Explain your thoughts.

Answer 2

Question

Chapter 6, Problem 21PS

a

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The proportion of investment in the risky portfolio (P) along with the proportion of risk-free asset.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

b

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviation of the rate of return related to client’s portfolio.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

c

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviations of another client with the condition that limit does not cross more than 12% and compare the risk aversion of both the clients.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Expert Solution & Answer

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Answer 3

Question

Chapter 6, Problem 21PS

a

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The proportion of investment in the risky portfolio (P) along with the proportion of risk-free asset.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

b

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviation of the rate of return related to client’s portfolio.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

c

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviations of another client with the condition that limit does not cross more than 12% and compare the risk aversion of both the clients.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 4

Question

Chapter 6, Problem 21PS

a

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The proportion of investment in the risky portfolio (P) along with the proportion of risk-free asset.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

b

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviation of the rate of return related to client’s portfolio.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

c

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviations of another client with the condition that limit does not cross more than 12% and compare the risk aversion of both the clients.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 5

Chapter 6, Problem 21PS

a

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The proportion of investment in the risky portfolio (P) along with the proportion of risk-free asset.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

b

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviation of the rate of return related to client’s portfolio.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

c

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviations of another client with the condition that limit does not cross more than 12% and compare the risk aversion of both the clients.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Answer 6

Chapter 6, Problem 21PS

a

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The proportion of investment in the risky portfolio (P) along with the proportion of risk-free asset.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Answer 7

Chapter 6, Problem 21PS

a

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The proportion of investment in the risky portfolio (P) along with the proportion of risk-free asset.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Answer 8

b

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviation of the rate of return related to client’s portfolio.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Answer 9

b

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviation of the rate of return related to client’s portfolio.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Answer 10

c

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviations of another client with the condition that limit does not cross more than 12% and compare the risk aversion of both the clients.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Answer 11

c

Summary Introduction

Adequate information:

Risk-free Asset E(rp)=11%

s_p=15%

r_f=5%

Expected rate of return or complete portfolio=8%

To compute: The standard deviations of another client with the condition that limit does not cross more than 12% and compare the risk aversion of both the clients.

Introduction:

Capital Allocation Line (CAL): It states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment. The formula used to calculate CAL is as follows:

E(rc)=[rf+y×(E(rp−rf))]

Where

E(r_c)= Expected return of the portfolio

r_f=Risk free rate

y=Proportion invested

E(r_p)=Expected return of the risky portfolio

Risk-aversion: It can be described as the preference of sure return or outcome over an investment which has either equal value or even more high value.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 6.A - Prob. 1P Ch. 6.A - Prob. 2P Ch. 6 - Prob. 1PS Ch. 6 - Prob. 2PS Ch. 6 - Prob. 3PS Ch. 6 - Prob. 4PS Ch. 6 - Prob. 5PS Ch. 6 - Prob. 6PS Ch. 6 - Prob. 7PS Ch. 6 - Prob. 8PS

Solution Summary: The author states the prevailing market equilibrium conditions for various portfolios which consist of both risky and risk-free investment.

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