You are a hedge fund manager and need to create a portfolio that will hopefully outperform...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are a hedge fund manager and need to create a portfolio that will hopefully outperform the stock market. The expected return and risk of your potential choices are: Asset S&P 500 Real Estate Fund (REITS) International Stock Fund S&P 500 REITS International Stock Fund Expected Return (%) 8% 12% 14% S&P 500 0.0256 0.0128 0.0128 0.0400 REITS Standard Deviation (%) 16% Variance-Covariance Matrix 0.0176 0.0088 20% 22% International Stock Fund 0.0176 0.0088 0.0484 The risk-free rate over this period is 3%. All given rates are annual rates. a) If you choose to hold 25% of your wealth in the S&P 500, 50% in REITS, and the rest in the international stock fund, what is the expected return of your portfolio? [2 marks] 850.25% 0.08 +0.54 0.12 +0++x0.14 = 11.5% b) What is the standard deviation of your portfolio? [4 marks] Varop = wi²si²+ W₂²√₂ + W5 53 +2 WW2 Cov12 +2 Wing Cov13 +24214, 2 = 0.² 0.10² + 0.5² 0.2² +2.25² 0.22² +2·0.25-0.5*0.0128 +2-Qur.225.0.0176 +2.0.250.5x0.0088 = 0.022225 c) Suppose the S&P 500 is a good proxy for the market portfolio. What are the individual betas for each asset in your portfolio? What is your 0.0176 0.162 -=0.6875 Bp=0.25.1 +0.5× 0.256 +0.15-0.6875 = 0.549875 d) If the actual annual returns of your portfolio over the last 10 years was 15%. Compared to your expected portfolio return calculation from part (a), what is the alpha of your portfolio? [1 mark] portfolio's beta? [4 marks] PM = 1 BRAUT = 0.01723² = 0.256 Pint'l. 这里他让我用a问里的Er来当作alpha里的Er?可是不应该是用CAPM的吗?到底 这里怎么算?还有用CAPM算的Er和a问里的Er本质区别是什么? e) Now you are having doubts as to whether the CAPM is the right asset pricing model for your portfolio and now thinking about using an alternative model, such as the APT, because your portfolio is exposed to more risk factors than you thought. The betas to the risk factors and expected risk premium are: 这个就是 这里就是 Factor Beta Expected Risk Premium (%) ? (c) (₂) 2 出来的嗎( CAPM (Market) Size Book-to- Market ? 1.5 0.5 4.0% 6.5% ER (CAPM) -1423? What is your portfolio's expected returns using APT? What is the portfolio's alpha with respect to APT? [4 marks] You are a hedge fund manager and need to create a portfolio that will hopefully outperform the stock market. The expected return and risk of your potential choices are: Asset S&P 500 Real Estate Fund (REITS) International Stock Fund S&P 500 REITS International Stock Fund Expected Return (%) 8% 12% 14% S&P 500 0.0256 0.0128 0.0128 0.0400 REITS Standard Deviation (%) 16% Variance-Covariance Matrix 0.0176 0.0088 20% 22% International Stock Fund 0.0176 0.0088 0.0484 The risk-free rate over this period is 3%. All given rates are annual rates. a) If you choose to hold 25% of your wealth in the S&P 500, 50% in REITS, and the rest in the international stock fund, what is the expected return of your portfolio? [2 marks] 850.25% 0.08 +0.54 0.12 +0++x0.14 = 11.5% b) What is the standard deviation of your portfolio? [4 marks] Varop = wi²si²+ W₂²√₂ + W5 53 +2 WW2 Cov12 +2 Wing Cov13 +24214, 2 = 0.² 0.10² + 0.5² 0.2² +2.25² 0.22² +2·0.25-0.5*0.0128 +2-Qur.225.0.0176 +2.0.250.5x0.0088 = 0.022225 c) Suppose the S&P 500 is a good proxy for the market portfolio. What are the individual betas for each asset in your portfolio? What is your 0.0176 0.162 -=0.6875 Bp=0.25.1 +0.5× 0.256 +0.15-0.6875 = 0.549875 d) If the actual annual returns of your portfolio over the last 10 years was 15%. Compared to your expected portfolio return calculation from part (a), what is the alpha of your portfolio? [1 mark] portfolio's beta? [4 marks] PM = 1 BRAUT = 0.01723² = 0.256 Pint'l. 这里他让我用a问里的Er来当作alpha里的Er?可是不应该是用CAPM的吗?到底 这里怎么算?还有用CAPM算的Er和a问里的Er本质区别是什么? e) Now you are having doubts as to whether the CAPM is the right asset pricing model for your portfolio and now thinking about using an alternative model, such as the APT, because your portfolio is exposed to more risk factors than you thought. The betas to the risk factors and expected risk premium are: 这个就是 这里就是 Factor Beta Expected Risk Premium (%) ? (c) (₂) 2 出来的嗎( CAPM (Market) Size Book-to- Market ? 1.5 0.5 4.0% 6.5% ER (CAPM) -1423? What is your portfolio's expected returns using APT? What is the portfolio's alpha with respect to APT? [4 marks]
Expert Answer:
Answer rating: 100% (QA)
d To calculate the alpha of your portfolio we need to compare the actual annual return of your portf... View the full answer
Related Book For
Fundamentals of corporate finance
ISBN: 978-0073382395
9th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
Posted Date:
Students also viewed these accounting questions
-
Suppose you are a hedge fund manager and you have two customers A and B. You have a good investment plan whose returns from $100,000 can be $130,000 with 20% chance; $110,000 with 70% chance; and...
-
The CFO of Bunyan Lumber Corporation, Anita Rai has decided to invest some money in the financial market to diversify the risks of business operations and increase rate of return. She has been...
-
The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. A hedge fund manager believes that Waterworks is underpriced, with an...
-
West State Furniture (WSF) manufactures desks and desk chairs using two departments within a single facility. The West Department produces the desks, and the State Department produces the chairs. WSF...
-
When the demand for toilet paper increases, the equilibrium quantity sold increases. Consumers are buying more, and producers are producing more. a. How do producers receive the signal that they need...
-
Assume you are an analyst evaluating Mesco Company. The following data are available in your financial analysis (unless otherwise indicated, all data are as of December 31, Year 5): Retained...
-
On April 1, 20x7, Morimoto Corporation issued $8,000,000 in 8.5 percent, five-year bonds at 98. The semiannual interest payment dates are April 1 and October 1. Prepare entries in journal form for...
-
Caribbean Tours total payroll for the month of January was $600,000. The following withholdings, fringe benefits, and payroll taxes apply: Federal and state income tax withheld ..................
-
Pacifico Company, a U . S . - based importer of beer and wine, purchased 1 , 7 0 0 cases of Oktoberfest - style beer from a German supplier for 4 5 9 , 0 0 0 euros. Relevant U . S . dollar exchange...
-
Jack Tasker opened his Auto Repair Shop in November 2023. The balance sheet at November 30, 2023, prepared by an inexperienced part-time bookkeeper, is shown below. Required Prepare a correct balance...
-
4. [20pts] Debug the following code by hand. Identify all errors, and whether they are a syntax or logic error (comments indicate how the code should work). int x=2, Y=4; Byte Z = -350; for (I=1; I...
-
A. Evatuate the two divergent challenges faced by Microfinance institutions(MFIs). Identify and explain the measurements used to assess the performance of MFIs in respect to these two challenges....
-
1. Late-arriving bills pertaining to the 20-5 year were Supplies Miscellaneous Expense Truck Expense Total $ 56.20 26.85 563.85 $646.90 2. Office supplies on hand at October 31 are valued at $360. 3....
-
Check my wo On January 1, 2024, the general ledger of Big Blast Fireworks includes the following account balances: Accounts Cash Debit Credit $23,300 Accounts Receivable 40,000 Allowance for...
-
Centennial Molding purchased machinery on January 1, 20X1, for $385,000. For 3 years, the company depreciated the machinery using the straight-line method assuming a 12-year useful life and a $24,000...
-
Mecca Copy, a photocopying center located on University Avenue, provided the following data to prepare a budgeted balance sheet for next year: Ending Balances Cash Accounts receivable Supplies...
-
K Find the area under the standard normal curve to the right of z = -1.25. OA. 0.5843 OB. 0.7193 OC. 0.6978 OD. 0.8944
-
6 (a) Briefly develop a mathematical model of the behaviour of a copper-twisted pair cable (b) Derive the magnetic energy from: w given that: K + w, where the - - k symbols have their usual meaning...
-
You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff...
-
a Why is it often necessary to standardize financial statements? b Name two types of standardized statements and describe how each is formed.
-
Would our goal of maximizing the value of the stock be different if we were thinking about financial management in a foreign country? Why or why not?
-
Pricing of facial tissues (Learning Objective 3) Softies produces facial tissues. Softies has $50 million in assets. Its yearly fixed costs are $12 million, and the variable cost of producing and...
-
Special order decision and considerations (Learning Objective 2) United Packagings contribution margin income statement follows: Wallace Farms wants to buy 5,000 produce boxes from United Packaging....
-
Prepare and use contribution margin statements for dropping a line decision (Learning Objective 4) The following operating income data of Abalone Seafood highlight the losses of the fresh seafood...
Study smarter with the SolutionInn App