Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 8, Problem 10PS
Portfolio risk and return Look back at the calculation for Johnson & Johnson and Ford in Section 8-1. Recalculate the expected portfolio return and standard deviation for different values of x1 and x2, assuming the correlation coefficient ρ12 = 0. Plot the range of possible combinations of expected return and standard deviation as in Figure 8.3. Repeat the problem for ρ12 = +.25.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Expected retun and standard deviation. Use the following information to answer the questions:
a. What is the expected return of each asset?
b. What is the variance and the standard deviation
c. What is the expected return of a portfolio with 1 1 Data Table
d. What is the portfolio's variance and standard de
- X
Hint Make sure to round all intermediate calculatio
Swers yo
(Click on the following icon D in order to copy its contents into a spreadsheet.)
a. What is the expected return of asset J?
(Round to four decimal places.)
Return on
Return on
Return on
Probability
of State
State of
Asset J in
Asset Kin
State
0.200
0.140
0.040
Asset L in
Economy
State
State
Вoom
0.28
0.070
0.260
0.180
Growth
0.37
0.25
0.070
Stagnant
0.070
0.060
-0.210
Recession
0.10
0.070
-0.100
Print
Done
Consider two assets. Suppose that the return on asset 1 has expected value 0.05 and standard deviation 0.1 and suppose that the return on asset 2 has expected value 0.02 and standard deviation 0.05. Suppose that the asset returns have correlation 0.4.Consider a portfolio placing weight w on asset 1 and weight 1-w on asset 2; let Rp denote the return on the portfolio.
Find the mean and variance of Rp as a function of w.
Suppose the utility function is U = E(r) - 0.5Ao2. Draw the indifference curve corresponding to
a utility level of 0.2 for an investor with a risk aversion coefficient of 3. Please note the vertical
line indicates expected return, and plot standard deviation on the horizontal line.
Chapter 8 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 8 - Portfolio risk and return Here are returns and...Ch. 8 - Efficient portfolios For each of the following...Ch. 8 - Sharpe ratio Use the long-term data on security...Ch. 8 - Efficient portfolios Figure 8.11 purports to show...Ch. 8 - CAPM Suppose that the Treasury bill rate is 6%...Ch. 8 - CAPM True or false? a. The CAPM implies that if...Ch. 8 - APT Consider a three-factor APT model. The factors...Ch. 8 - CAPM True or false? Explain or qualify as...Ch. 8 - Portfolio risk and return Look back at the...Ch. 8 - Portfolio risk and return Mark Harrywitz proposes...
Ch. 8 - Portfolio risk and return Ebenezer Scrooge has...Ch. 8 - Portfolio beta Refer to Table 7.5. a. What is the...Ch. 8 - CAPM The Treasury bill rate is 4%, and the...Ch. 8 - Portfolio risk and return Percival Hygiene has IO...Ch. 8 - Cost of capital Epsilon Corp. is evaluating an...Ch. 8 - Prob. 18PSCh. 8 - APT Consider the following simplified APT model:...Ch. 8 - Prob. 20PSCh. 8 - Prob. 21PSCh. 8 - Prob. 22PSCh. 8 - Prob. 23PSCh. 8 - Efficient portfolios Look again at the set of the...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Explain correlation to your client. Calculate the estimated correlation between Blandy and Gourmange. Does this explain why the portfolio standard deviation was less than Blandys standard deviation?arrow_forwardCompute the residual risk measure for portfolio A. Round off your final answer to three digits after the decimal point. Compute the appraisal ratio for portfolio B. Round off your final answer to three digits after the decimal point.arrow_forwardThere are two assets 1 and 2, with returns X and Y correspondingly. Return X is a random variable with mean 1 and variance 1; return Y is a random variable with mean 1 and variance 3. We know that the expectation of X*Y is equal to 0. Find the share of asset 1 in the risk-minimizing portfolio.arrow_forward
- Consider the expected return and standard deviation of the following two assets: Asset 1: E[r1]=0.1 and σ1=0.2 Asset 2: E[r2]=0.3 and σ2=0.4 (a) Draw (e.g. with Excel) the set of achievable portfolios in mean-standard deviation space for the cases: (i) ρ12= -1, (ii) ρ12=0. (b) Suppose ρ12=-1. Which portfolio has the minimal variance? What is the variance and expected return of that portfolio? (c) Derive the formula for the variance of a portfolio with four assets.arrow_forwardThe following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 o(R) 0.4 0.45 [H]Z 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. Figure (1) shows an investor with a conservative investment behavior. In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. 0.15 Figure 2 0.2 0.25 o (R) 0.3 0.35 0.4 0.45arrow_forwardConsider the following information for four portfolios, the market, and the risk-free rate (RFR): Portfolio Return Beta SD A1 0.15 1.25 0.182 A2 0.1 0.9 0.223 A3 0.12 1.1 0.138 A4 0.08 0.8 0.125 Market 0.11 1 0.2 RFR 0.03 0 0 Refer to Exhibit 18.6. Calculate the Jensen alpha Measure for each portfolio. a. A1 = 0.014, A2 = -0.002, A3 = 0.002, A4 = -0.02 b. A1 = 0.002, A2 = -0.02, A3 = 0.002, A4 = -0.014 c. A1 = 0.02, A2 = -0.002, A3 = 0.002, A4 = -0.014 d. A1 = 0.03, A2 = -0.002, A3 = 0.02, A4 = -0.14 e. A1 = 0.02, A2 = -0.002, A3 = 0.02, A4 = -0.14arrow_forward
- Which of the following statements regarding the graph of the SML is most accurate? A Select one OA. The beta of Portfolios A, B, and C are identical as they fall directly on the line. B. The expected return of Portfolio C is the difference between the market's expected return and the risk-free rate. C. Portfolio A has lower systematic risk than Portfolio B. D. The slope of the line is the market risk premium.arrow_forwardb. What is the variance of this portfolio? The standard deviation? Please show me all steps of the calculations.arrow_forwardThe optimal proportion of the risky asset in the complete portfolio is given by the equation below y*= E(Rp− Rf) A0² For each of the variables on the right side of the equation, discuss the impact of the variable's effect on y* and why the nature of the relationship makes sense intuitively. Assume the investor is risk aversearrow_forward
- Which of the following statements regarding the graph of the SML is most accurate? Select one O A. O B. B-1.0 The beta of Portfolios A, B, and C are identical as they fall directly on the line. The expected return of Portfolio C is the difference between the market's expected return and the risk-free rate. O C. Portfolio A has lower systematic risk than Portfolio B. OD. The slope of the line is the market risk premium.arrow_forwardWhen working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.arrow_forwardConsider two portfolios, Portfolio A and Portfolio B, with the following performance metrics: - Portfolio A has a Sharpe Ratio of 0.8, a Treynor Ratio of 1.2, and a Jensen's Alpha of 0.5. - Portfolio B has a Sharpe Ratio of 1.2, a Treynor Ratio of 0.9, and a Jensen's Alpha of -0.2. Which of the following statements is correct regarding the performance of these portfolios? Portfolio A has a higher risk-adjusted return when the risk is measured by the beta. Portfolio B outperforms the risk-adjusted return suggested by CAPM. Portfolio A and B have similar risk-adjusted returns, but Portfolio B exhibits negative abnormal returns. Portfolio B has a higher risk-adjusted return when the risk is measured by the standard deviation. Portfolio A outperforms Portfolio B in terms of both risk-adjusted return and abnormal returns suggested by CAPM.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Portfolio Management; Author: DevTechFinance;https://www.youtube.com/watch?v=Qmw15cG2Mv4;License: Standard YouTube License, CC-BY