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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
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Textbook Question
Chapter 8, Problem 16PS
Portfolio risk and return Percival Hygiene has $IO million invested in long-term corporate bonds. This bond portfolio's expected annual
- a) Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 6%.
- b) Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is + .l.
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Please explain using Excel and show/explain formulas.
Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio’s expected annual rate of return is 8%, and the annual standard deviation is 10%. Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor’s 500 index. The index has an expected return of 13%, and its standard deviation is 14%.
a. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 3%.
multiple choice
Yes
No
b. Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +0.3.
multiple choice
Yes
No
Your client, Sandra is considering three assets: a bond mutual fund, a cryptocurrency ETF, and US
Treasury bills. The annualized T-bill rate is 2%. The information below refers to the two risky assets.
Expected return
Standard deviation
Bond mutual fund Cryptocurrency ETF
3%
10%
Correlation coefficient 0
14%
20%
(a) What are the proportions of each asset, in Sandra's optimal risky portfolio?
(b) Suppose the return for each risky asset follows a normal distribution. What is the 1% value-at-risk
for Sandra's optimal risky portfolio? Hint: P(Z<-2.326) = 0.01 where Z~N(0, 1).
1.
What is your expected portfolio return of an investment portfolio with a 60/40 allocation of stocks and bonds, respectively, if you expect long term equities to return 8%, and long term bonds to return 2%?
5.6%
6.2%
4.8%
5.1%
2.
You are looking into developing your first investment portfolio. After assessing your risk tolerance, you believe that an 90/10 allocation of stocks and bonds, respectively, is where you want to begin. You believe that 7% is what stocks will return over the next ten years, and 4% is what you expect to return in your bond portfolio. If you invest $300/month for the next ten years, what will your portfolio be worth?
$51,077
$47,579
$52,843
$44,880
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...
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