EBK PRINCIPLES OF CORPORATE FINANCE
12th Edition
ISBN: 9781259358487
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Textbook Question
Chapter 8, Problem 1PS
Efficient portfolios For each of the following pairs of investments, state which would always be preferred by a rational investor (assuming that these are the only investments available to the investor):
- a. Portfolio A, r = 18% σ = 20%; portfolio B, r = 14% σ = 20%.
- b. Portfolio C, r = 15% σ = 18%; portfolio D, r = 13% σ = 8%.
- c. Portfolio E, r = 14% σ = 16%; portfolio F, r = 14% σ = 10%.
Expert Solution
Summary Introduction
To discuss: Whether portfolio A or B most preferable for a rational investor
Explanation of Solution
Portfolio A : Investors prefer maximum return at a given level of risk.
Expert Solution
Summary Introduction
To discuss: Whether portfolio C or D most preferable for a rational investor
Explanation of Solution
Portfolio C : Investors prefer maximum return at a given level of risk.
Expert Solution
Summary Introduction
To discuss: Whether portfolio D or E most preferable for a rational investor
Explanation of Solution
Portfolio D: Investors prefer maximum return per unit of risk.
Expert Solution
Summary Introduction
To discuss: Whether portfolio E or F most preferable for a rational investor
Explanation of Solution
Portfolio F: Investors prefer low risk given a stated rate of return.
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Students have asked these similar questions
a. Using the data provided in problem 3, determine the return and risk for a portfolio made up of the following three stocks if you want to distribute your investment as follows: 20% in ADRE; 65% in MSFT and 15% in GOOG.b. How would the portfolio be affected if you distributed your investment in the following way: 30% in ADRE; 25% on MSFT and 45% on GOOG?c. Which of the two portfolios would a risk seeking investor prefer and why?
You manage a risky portfolio with an expected rate of return of 19% and a standard deviation of 31%. The T-bill rate is 5%.
Suppose that your client prefers to invest in your fund a proportion y that maximizes the expected return on the complete portfolio subject to the constraint that the complete portfolio’s standard deviation will not exceed 19%.
a. What is the investment proportion, y? (Round your answer to 2 decimal places.)
b. What is the expected rate of return on the complete portfolio? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
The firm wishes to estimate the beta of a portfolio that consists of two assets X and Y.
The investment manager of the firm has gathered the following information on the two
assets.
Securities
Rate of Return
Standard
Deviation
Beta
X
20%
20%
1.5
Y
10%
30%
1.0
Risk free asset
5%
Calculate:
The beta of the portfolio if 75% of the funds are invested in Y and 25% in X
The portfolio expected return and the portfolio beta if you invest 35 % in X, 45% in Y
and 20 % in the risk-free asset
Assuming the CAPM applies, if the market’s expected return is 13 percent, the risk
free rate is 8% and stock X’s required rate of return is 16%, what is the stock’s beta
coefficient?
Chapter 8 Solutions
EBK PRINCIPLES OF CORPORATE FINANCE
Ch. 8 - Efficient portfolios For each of the following...Ch. 8 - Efficient portfolios Figure 8.11 purports to show...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 risk and return Here are returns and...Ch. 8 - Portfolio risk and return Percival Hygiene has IO...Ch. 8 - Sharpe ratio Use the long-term data on security...Ch. 8 - Portfolio beta Refer to Table 7.5. a. What is the...Ch. 8 - CAPM True or false? Explain or qualify as...
Ch. 8 - CAPM True or false? a. The CAPM implies that if...Ch. 8 - CAPM Suppose that the Treasury bill rate is 6%...Ch. 8 - CAPM The Treasury bill rate is 4%, and the...Ch. 8 - Cost of capital Epsilon Corp. is evaluating an...Ch. 8 - APT Consider a three-factor APT model. The factors...Ch. 8 - Prob. 18PSCh. 8 - APT Consider the following simplified APT model:...Ch. 8 - Prob. 20PSCh. 8 - Three-factor modelThe following table shows the...Ch. 8 - Efficient portfolios Look again at the set of the...
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