EBK FUNDAMENTALS OF FINANCIAL MANAGEMEN
14th Edition
ISBN: 8220100546587
Author: Brigham
Publisher: CENGAGE L
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Question
Chapter 8, Problem 1Q
a.
Summary Introduction
To explain: The possibility of the portfolio being riskless.
Portfolio:
The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by the investors and financial users. A portfolio is constructed according to the risk tolerance and the objectives of the company.
a.
Expert Solution
Answer to Problem 1Q
- The given portfolio consists of $250,000 of long-term U.S. government bonds. The given portfolio cannot be riskless.
- This is so because a portfolio contains some risk in context with the interest rate.
- The interest rate goes up and down in the market and this condition will affect the
value of the bonds. So, it is not possible for the portfolio to be riskless.
Explanation of Solution
- The portfolio is a combination or a set of investments in form of bonds, assets and cash equivalents.
- Any kind of investment contains some risk.
- The factor of risk depends upon the rate of interest that fluctuates with the market conditions.
- Hence, the idea of having a riskless portfolio does not work.
Conclusion
Thus, it is not possible for a portfolio to be riskless.
b.
Summary Introduction
To explain: The possibility of Treasury bill portfolio being riskless.
b.
Expert Solution
Answer to Problem 1Q
- In the given situation, the portfolio consists of $250,000 in the form of Treasury bills. These bills have duration of 30 days after which they mature and they are again reinvested.
- The person wants to live in the investment income from the portfolio by maintaining a constant standard of living. However, this condition is not possible as this portfolio again contains risk.
- The inflation rate is higher than the interest rate. In this case, the investor will get the
purchasing power and by the result of which his standard of living can decline. - However, they contain less risk as treasury bills are backed by the U.S. government.
Explanation of Solution
- The treasury bills are the short-term U.S. government securities which do not give interest but is issued at a discounted price.
- In the given case, the portfolio is of treasury bills, which once matured is again reinvested.
- By the investment income, the person has to maintain a constant standard of living. This is not possible because treasury bills also contain some risk.
- However, the treasury bills are those kinds of securities which are backed by the government, so they contain a minimum risk or can be considered as riskless.
Conclusion
The treasury bills portfolio can also be not truly riskless.
c.
Summary Introduction
To explain: The possible least risky security.
c.
Expert Solution
Answer to Problem 1Q
- There is no security which is totally riskless.
- But some securities can be closest to no risk situation which is Treasury inflation-protected securities.
- As these securities are guaranteed by the U.S. government and their return is adjusted to compensate for the inflation, so these are somewhat riskless.
Explanation of Solution
- The securities always contain some risk in it. There are many factors which effect the security or the stock.
- These are the interest rates and the inflation rates.
- There is no such security which is considered to be riskless.
- However, the treasury bills are backed by the U.S. government, so these are less risky.
- The treasury inflation protected securities are protected by the inflation effect and so are considered to be almost least risky security.
Conclusion
Thus, the Treasury inflation-protected securities are the least risky security.
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Students have asked these similar questions
Suppose you owned a portfolio consisting of $250,000 of long-term U.S. government bonds.a. Would your portfolio be riskless? Explain.b. Now suppose the portfolio consists of $250,000 of 30-day Treasury bills. Every 30 daysyour bills mature, and you will reinvest the principal ($250,000) in a new batch ofbills. You plan to live on the investment income from your portfolio, and you want tomaintain a constant standard of living. Is the T-bill portfolio truly riskless? Explain.c. What is the least risky security you can think of? Explain.
Suppose you have $375,000 in cash, and you decide to borrow another $63,750 at a 7% interest rate to invest in the stock market. You invest the entire $438,750 in a portfolio J with a 20% expected return and a 28% volatility.
a. What is the expected return and volatility (standard deviation) of your investment?
b. What is your realized return if J goes up 39% over the year?
c. What return do you realize if J falls by 19% over the year?
Suppose you have $100,000 in cash, and you decide to borrow another $25,000 at a 6% interest rate to invest in the stock market. You invest the entire $125,000 in a portfolio J with a 24% expected return and a 26% volatility.
What is the expected return and volatility (standard deviation) of your investment?
What is your realized return if J goes up 13% over the year?
What return do you realize if J falls by 26% over the year?
Chapter 8 Solutions
EBK FUNDAMENTALS OF FINANCIAL MANAGEMEN
Ch. 8 - Prob. 1QCh. 8 - Prob. 2QCh. 8 - Prob. 3QCh. 8 - Is it possible to construct a portfolio of...Ch. 8 - Stock A has an expected return of 7%, a standard...Ch. 8 - A stock had a 12% return last year, a year when...Ch. 8 - If investors aversion to risk increased, would the...Ch. 8 - Prob. 8QCh. 8 - In Chapter 7, we saw that if the market interest...Ch. 8 - Prob. 1P
Ch. 8 - PORTFOLIO BETA An individual has 35,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - EXPECTED AND REQUIRED RATES OF RETURN Assume that...Ch. 8 - BETA AND REQUIRED RATE OF RETURN A stock has a...Ch. 8 - EXPECTED RETURNS Stocks X and Y have the following...Ch. 8 - Prob. 7PCh. 8 - BETA COEFFICIENT Given the following information...Ch. 8 - REQUIRED RATE OF RETURN Stock R has a beta of 1.5,...Ch. 8 - CAPM AND REQUIRED RETURN Bradford Manufacturing...Ch. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 9%, rM = 14%...Ch. 8 - CAPM, PORTFOLIO RISK. AND RETURN Consider the...Ch. 8 - PORTFOLIO BETA Suppose you held a diversified...Ch. 8 - Prob. 15PCh. 8 - CAPM AND PORTFOLIO RETURN You have been managing a...Ch. 8 - PORTFOLIO BETA A mutual fund manager has a 20...Ch. 8 - EXPECTED RETURNS Suppose you won the lottery and...Ch. 8 - EVALUATING RISK AND RETURN Stock X has a 10%...Ch. 8 - REALIZED RATES OF RETURN Stocks A and B have the...Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - Prob. 22SPCh. 8 - Prob. 23ICCh. 8 - Prob. 1TCLCh. 8 - Prob. 2TCLCh. 8 - Prob. 3TCLCh. 8 - Using Past Information to Estimate Required...Ch. 8 - Prob. 5TCLCh. 8 - Prob. 7TCLCh. 8 - Prob. 8TCL
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