Question
1) An investor chooses a portfolio comprising a risk-free asset, yielding r 0 = 2%, and a single risky asset with expected rate of return
1) An investor chooses a portfolio comprising a risk-free asset, yielding r0 = 2%, and a single risky asset with expected rate of return Z = 6%, and standard deviation of return Z = 0.1, to maximize the objective function, P 5p2, where P is the expected rate of return on the portfolio and P2 is the variance of the rate of return on the portfolio.
A. The proportion of the portfolio invested in the risk-free asset equals 0.60. B. The proportion of the portfolio invested in the risk-free asset equals 0.40. C. The proportion of the portfolio invested in the risky asset equals 0.06 (i.e., 6%).
D. The proportion of the portfolio invested in the risky asset equals 0.60,(i.e.,60%).
There is at least one correct answer.
2) An investor chooses a portfolio that maximizes a mean-variance objective function. [Notation: r0: risk-free interest rate; j: expected rate of return on asset j; j: stan- dard deviation of return on asset j; P : expected rate of return on the optimum port- folio P ; P : standard deviation of the return on the optimum portfolio P ; jP : co- variance between the rate of return on asset j and portfolio P .]
At the investors optimum, the following condition holds for every asset, j:
A. (j r0)/j2 =(P r0)/2P. B. (i r0)/i = (j r0)/j, for every pair of assets i and j (i j).
C. (j r0)/jP = (P r0)/2P .
D. (P r0)=(j r0)jP, where jP =jP/2P.
E. (j r0)/j = (P r0)/jP .
There are at least 1 correct answer.
3) The expected rate of return on an asset, j, equals 10%. Its standard deviation of return, j , equals 0.20, the standard deviation of the market return, M , equals 0.4, and the risk-free interest rate is 2%. The standard deviation of return for a benchmark portfolio, B , equals 0.5, to be used in calculating the Risk Adjusted Performance.
A. Assuming the CAPM holds, the assets beta-coefficient equals 0.5.
B. Assuming the CAPM holds, the assets beta-coefficient equals 0.8.
C. The assets Risk Adjusted Performance equals 4%. D. The assets Risk Adjusted Performance equals 8%.
E. The assets Risk Adjusted Performance equals 12%.
F. The assets Risk Adjusted Performance equals 22%.
There are at least 1 correct answer.
4. Asset js standard deviation of return is j = 0.4, while for the market portfolio M=0.2. The expected rate of return on the market portfolio is M =8% and risk- free interest rate is r0 = 3%. Let jM = the correlation between the rate of return on asset j and that of the market portfolio.
a) If jM = 1, asset js beta-coefficient, j = 1.
b) If jM = 0.6, asset js beta-coefficient, j = 1.2.
c) Asset js beta-coefficient j = 2.0 irrespective of the value of jM .
d) The information is necessarily incompatible with the Capital Asset Pricing Model, CAPM, if jM <0.
e) If jM = 0.6, the CAPM predicts that js expected rate of return equals 9%.
f) If jM = 0, the CAPM predicts that asset js expected rate of return equals 5%.
There are at least one correct answer.
5. Asset js standard deviation of return is j = 0.4, while for the market portfolio M = 0.5. The covariance between the asset js return and the market return is: jM = 0.2. The expected rate of return on the market portfolio is M = 6% and risk-free interest rate is r0 = 1%.
a) Asset js beta-coefficient is j = jM /M = 0.4.
b) Asset j lies on the Capital Market Line, CML, (i.e., the Sharpe ratio for asset j equals that for the market portfolio) in the Capital Asset Pricing Model, CAPM.
c) The CAPM predicts that asset js expected return is j = 6% because its beta- coefficient equals 1.
d) The CAPM predicts that asset js expected return is j = 1% because its beta-coefficient is zero.
e)The CAPM predicts that asset js expected return is j = 4% because its beta- coefficient is 0.6.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started