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 2PS
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%.
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Students have asked these similar questions
The 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 averse
Consider the following performance data for a portfolio manager:
Benchmark
Portfolio
Index
Portfolio
Weight
Weight
Return
Return
Stocks
0.65
0.7
0.11
0.12
Bonds
0.3
0.25
0.07
0.08
Cash
0.05
0.05
0.03
0.025
a.Calculate the percentage return that can be attributed to the asset allocation decision.
b.Calculate the percentage return that can be attributed to the security selection decision.
The 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 0.45
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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