PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 7, Problem 25PS
Portfolio risk Here are some historical data on the risk characteristics of Ford and Harley Davidson:
Assume the standard deviation of the return on the market was 9.5%.
- a. The correlation coefficient of Ford’s return versus Harley Davidson is 0.30. What is the standard deviation of a portfolio invested half in each share?
- b. What is the standard deviation of a portfolio invested one-third in Ford, one-third in Harley Davidson, and one-third in risk-free Treasury bills?
- c. What is the standard deviation if the portfolio is split evenly between Ford and Harley Davidson and is financed at 50% margin, that is, the investor puts up only 50% of the total amount and borrows the balance from the broker?
- d. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.26 like Ford? How about 100 stocks like Harley Davidson? [Hint: Part (d) should not require anything but the simplest arithmetic to answer.]
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Here are some historical data on the risk characteristics of Ford and Harley Davidson.
Ford
Harley Davidson
β (beta)
1.26
0.69
Yearly standard deviation of return (%)
30.9
16.9
Assume the standard deviation of the return on the market was 12.0%.
a. The correlation coefficient of Ford’s return versus Harley Davidson is 0.27. What is the standard deviation of a portfolio invested half in each share?
b. What is the standard deviation of a portfolio invested one-third in Ford, one-third in Harley Davidson, and one-third in risk-free Treasury bills?
c. What is the standard deviation if the portfolio is split evenly between Ford and Harley Davidson and is financed at 50% margin, that is, the investor puts up only 50% of the total amount and borrows the balance from the broker?
d-1. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.26 like Ford?
d-2. What is the approximate standard deviation of a portfolio composed of…
An analyst wants to evaluate Portfolio X, consisting entirely of U.S. common stocks, using both the Treynor and Sharpe measures of portfolio performance. The following table provides the average annual rate of return for Portfolio X, the market portfolio (as measured by the Standard and Poor’s 500 Index), and U.S. Treasury bills (T-bills) during the past eight years.
Rate Annual Averageof Return
STANDARD DEVIATION OF RETURN
BETA
Portfolio X
10
13
0.40
S&P 500
12
10
1.00
T-bills
7
n/a
n/a
n/a = not applicable
Calculate both the Treynor measure and the Sharpe measure for both Portfolio X and the S&P 500. Round your answers for the Treynor measure to one decimal place and for the Sharpe measure to three decimal places.
Treynor measure
Sharpe measure
Portfolio X
7.5
S&P 500
5
For the above shares if the expected inter correlations are given as follows:
Investment in RM millions
Weight
Correlation
Petronas
23
?
0.15(P,M)
Maxis
47
?
0.25(M,B)
Berjaya
40
?
0.35(B,P)
d) Compute Weights
e) Compute the expected portfolio return and
f) Expected portfolio risk
g) Portfolio Sharpe ratio
Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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