Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 8, Problem 4PS
Portfolio risk and return Look back at the calculation for Southwest Airlines and Amazon in Section 8-1.
- a) 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.
- b) Repeat the problem for ρ12 = +.50.
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Consider 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 = -0.14
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.
The following portfolios are being considered for investment. During the period under consideration, RFR = 0.07.Portfolio Return Beta σiA 0.15 1.0 0.05B 0.20 1.5 0.10C 0.10 0.6 0.03D 0.17 1.1 0.06Market 0.13 1.0 0.04
a. Compute the Sharpe measure for each portfolio and the market portfolio.
b. Compute the Treynor measure for each portfolio and the market portfolio.
c. Rank the portfolios using each measure, explaining the cause for any differences you find in the rankings.
Chapter 8 Solutions
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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