CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196239
Author: Bodie
Publisher: MCG
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Textbook Question
Chapter 7, Problem 2CP
Kay, a portfolio n1anacr at Collins Asset v1anagemenr, is using the
Forecasted Returns, Standard Deviations, and Betas Forecasted Return Standard Deviation Beta Stock X 14.0% 36% 0.8 Stock Y 17.0 25 15 Market index 4 0 1 5 1.0 Risk-free, rate 5.0
a. Calculate expected return and alpha for each stock.
b. Identify and justify which stock would be more appropriate for an investor who wants to:
i. Add this stock lo a well-diversified equity portfolio.
ii. Hold this stock as a single-stock portfolio.
Et
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Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing
model for making recommendations to her clients. Her research department has developed the
information shown in the following exhibit.
Forecast Returns, Standard Deviations, and Betas
Stock X
Stock Y
Market index
Risk-free rate
Forecast Return
14.0%
17.0%
14.0%
5.0%
Standard Deviation
36%
25%
15%
Beta
0.8
1.5
1.0
a. Calculate expected return and alpha for each stock.
b. Identify and justify which stock would be more appropriate for an investor who wants to
i. Add this stock to a well-diversified equity portfolio.
ii. Hold this stock as a single-stock portfolio.
As the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 8, while Mr. B has a risk-tolerance factor of 27. The characteristics for four model portfolios follow:
ASSET MIX
Bond
93%
75
32
13
Portfolio
1
2
3
4
Stock
7%
25
GB
87
a. Calculate the expected utility of each prospective portfolio for each of the two clients. Do not round intermediate calculations. Round your answers to two decimal places.
1
2
3
Portfolio
Ms. A
ER
8%
9
10
11
b. Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B?
Portfollo-Select-represents the optimal strategic allocation for Ms. A. Portfolio Select is the optimal allocation for Mr. B.
c. For Ms. A, what level of risk tolerance would leave her indifferent between having Portfolio 1 or Portfolio 2 as her strategic…
Using the stock price data for any two companies provided below carry out the following tasks:
1.Compute, for each asset:
i.Total Returns
ii.Expected returns
iii.standard deviation
iv.Correlation Coefficient
2.Construct the variance-covariance matrix
3.Construct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio.
4.Reconstruct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio.
5.Use Solver to determine optimal risky portfolio.
6.Create hypothetical portfolios (commencing from Weight A=0 and weight B=100)
7.Calculate Expected return and Standard Deviation for all the above combinations
8.Graph the efficient frontier
9.Graph the optimal portfolio
10.Assuming that the investors prefers lower level of risk than what a portfolio of risky assets offer, introduce a risk free asset in the portfolio with a return of 3%
11.Using hypothetical weights (A= Portfolio of Risky Assets, B= 1 Risk Free…
Chapter 7 Solutions
CONNECT WITH LEARNSMART FOR BODIE: ESSE
Ch. 7 - Prob. 1PSCh. 7 - Consider the statement: “If we can identify a...Ch. 7 - Are the following true or false? Explain. (LO 7-5)...Ch. 7 - Here are data on two companies. The T-bill rate is...Ch. 7 - Characterize each company in the previous problem...Ch. 7 - What is the expected rate of return for a stock...Ch. 7 - Kaskin, Inc., stock has a beta of 1.2 and Quinn,...Ch. 7 - What must be the beta of a portfolio with E(rf)) =...Ch. 7 - The market price of a security is $40. Its...Ch. 7 - You arc a consultant to a large manufacturing...
Ch. 7 - Consider the following table, which gives a...Ch. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Two investment advisers are comparing performance....Ch. 7 - Suppose the yield on short-term government...Ch. 7 - Based on current dividend yields and expected...Ch. 7 - Consider the following data for a single index...Ch. 7 - Assume both portfolios A and B are well...Ch. 7 - Prob. 29PSCh. 7 - Prob. 30PSCh. 7 - Et
Ch. 7 - Suppose two factors are identified for the U.S....Ch. 7 - Suppose there are two independent economic...Ch. 7 - As a finance intern at Pork Products, Jennifer...Ch. 7 - Suppose the market can be described by the...Ch. 7 - Which of the following statements about the...Ch. 7 - Kay, a portfolio n1anacr at Collins Asset...Ch. 7 - Prob. 3CPCh. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CPCh. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CPCh. 7 - 12. A zero-investment, well-diversified portfolio...Ch. 7 - 13. An investor takes as large a position as...Ch. 7 - In contrast to the capital asset pricing model,...Ch. 7 - Prob. 1WMCh. 7 - Prob. 2WMCh. 7 - Prob. 3WMCh. 7 - a. Which of the stocks would you classify as...
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