8. An investor currently owns a portfolio of stocks and expects that the stock market to fall next quarter. How does the investor hedge risk without selling the portfolio?
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8. An investor currently owns a portfolio of stocks and expects that the stock market to fall next quarter. How does the investor hedge risk without selling the portfolio?
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- If the market portfolio unexpectedly goes down 25% (i.e., there is a -25% return on the aggregate market of stocks and other securities in existence), what return would likely occur on your stock?1. You are trying to plan your investments for the next year. You havedecided that the market will either be strong (a bull market), weak (abear market) or normal. You think that stocks, bonds, and bills will earn the following retruns in these secnarios:You have also decided that you have a risk-aversion (A) of 8. (a) What is the expected return for each of the securities?(b) What is the volatility of each security return?(c) What is the covariance between stock and bond returns?9. You own a portfolio that has $ 1,750 invested in Stock A and $ 3,900 invested in Stock B. If the 9 percent and 17 percent, expected returns on these stocks are respectively, what is the expected return on the portfolio?
- A portfolio manager eliminates the systematic risk of his stock portfolio over the next month using futures on the S&P 500 index. What return does the manager expect on the hedged portfolio over the next month?A fund manager owns a portfolio of 10 stocks. Explain how the manager can reduce the systematic risk of his portfolio by 10% over the next year using futures. Will the expected return on the manager’s portfolio also drop by 10%? Is it possible for the manager to perfectly hedge his exposure to equity risk? Explain your answers.An investor aims to build a portfolio with annual return equal to 8.88%. In the market only two stocks (A and B) are available, with annual historical returns equal to 9.6% and 7.8% respectively. Assume future returns have the same distribution of past returns. What is the percentage of funds that the investor must allocate to the stock A and B?
- What return do you expect on a portfolio next year that is currently invested 15% in your stock (with an expected return as computed in c.1 (8.06%) ) and 85% in an equity mutual fund (which is an investment company that invests into stocks for investors) that has a CAPM expected return of 8.52%?A) What expected return should an investor expect from investments in common stock? You are given the following information: Risk free rate of return = 4%; market risk premium = 11%; Beta of the stock (assume CAPM holds) = 0.72. B) Stock A with beta of 0.8 offers a 11% return while stock B with a beta of 1.2 offers a 15% return. What is the risk-free rate? What is the common market return? Assume CAPM holds.a) Assume that there are two states of the economy, namely a booming economy and a stagnant economy. In a booming economy, a stock brings 35% return while it brings 5% return in a stagnant economy. If the expected return on the stock is 15%, what is the probability of a booming economy (pboom )? b) An investor divides her portfolio into three parts with equal weights: one part in a risk-free asset, one part in a market portfolio, and one part in a stock with beta of 1.50. What is the beta of the investor's overall portfolio?
- 41.You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. Year Beginning of Year Price # of Shares Bought or Sold 2016 $ 50.00 100 bought 2017 $ 55.00 50 bought 2018 $ 51.00 75 sold 2019 $ 54.00 75 sold What is the dollar-weighted return over the entire time period? 2.21% 2.87% 2.6% .74%Please respond to both. You buy a stock when you expect that its price will rise, you short a stock when you expect that its price will fall. True or False. A stock has an expected dividend of $7 and a current price of $74. The required return on the stock is 14%, what is the stock’s capital gain’s yield?Consider the following information about Stocks X and Y: State of Economy Probability of State Stock X Returns Stock Y Returns Recession 0.15 0.11 -0.25 Steady 0.55 0.18 0.11 Boom 0.30 0.08 0.31 The market risk premium is 7.5 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “riskier”? Explain.
