1. Consider equity (E) and bond (B) mutual funds with the following properties: Fund Risk premium...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. Consider equity (E) and bond (B) mutual funds with the following properties: Fund Risk premium SD 15.15% 8.85% E B 5.75% 2.60% The correlation between the returns on E and B is 0.40. The risk-free return is 1.65%. (a) Consider a 60-40 portfolio that invests 60% and 40% in the equity and bond funds, respectively (i.e., we = 0.6 and we = 0.4). Compute the risk premium, standard deviation, and Sharpe ratio for the 60-40 portfolio. (10 points) (b) Compute the weights for the minimum-variance portfolio that is fully invested in the two funds. Compute the risk premium, standard deviation, and Sharpe ratio for the minimum-variance portfolio. (10 points) (c) Compute the weights for the portfolio with the maximum Sharpe ratio that is fully invested in the two funds (i.e., the tangency portfolio). Compute the risk premium, standard deviation, and Sharpe ratio for the tangency portfolio. (10 points) (d) Suppose that a mean-variance investor has a risk-aversion index of three. Com- pute the investor's optimal allocations to the risk-free asset and tangency port- folio. What are the weights for E, B, and the risk-free asset for the optimal complete portfolio. Compute the expected return and standard deviation for the optimal complete portfolio. (10 points) 1. Consider equity (E) and bond (B) mutual funds with the following properties: Fund Risk premium SD 15.15% 8.85% E B 5.75% 2.60% The correlation between the returns on E and B is 0.40. The risk-free return is 1.65%. (a) Consider a 60-40 portfolio that invests 60% and 40% in the equity and bond funds, respectively (i.e., we = 0.6 and we = 0.4). Compute the risk premium, standard deviation, and Sharpe ratio for the 60-40 portfolio. (10 points) (b) Compute the weights for the minimum-variance portfolio that is fully invested in the two funds. Compute the risk premium, standard deviation, and Sharpe ratio for the minimum-variance portfolio. (10 points) (c) Compute the weights for the portfolio with the maximum Sharpe ratio that is fully invested in the two funds (i.e., the tangency portfolio). Compute the risk premium, standard deviation, and Sharpe ratio for the tangency portfolio. (10 points) (d) Suppose that a mean-variance investor has a risk-aversion index of three. Com- pute the investor's optimal allocations to the risk-free asset and tangency port- folio. What are the weights for E, B, and the risk-free asset for the optimal complete portfolio. Compute the expected return and standard deviation for the optimal complete portfolio. (10 points)
Expert Answer:
Answer rating: 100% (QA)
a To compute the risk premium standard deviation and Sharpe ratio for the 6040 portfolio we first need to compute the expected return and variance of the portfolio ... View the full answer
Related Book For
Understanding Basic Statistics
ISBN: 9781111827021
6th Edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase
Posted Date:
Students also viewed these finance questions
-
Lycan Inc. has 9.5% coupon bonds on the market that have 15 years left to maturity and a face value of $1,000.The bonds make annual payments.If the yield to maturity on these bonds is 7.5%, what is...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
13. What is a lower bound for the price of 3-month call option on a non- dividend-paying stock when the stock price is $50, the strike price is $45, and the 3-month risk-free interest rate is 8%?...
-
Hooghly Products manufactures a silicone paste wax that goes through three processing departments- Cracking, Blending, and Packing. All raw materials are introduced at the start of work in the...
-
Roulette is a very popular game in many American casinos. In Roulette, a ball spins on a circular wheel that is divided into 38 arcs of equal length, bearing the numbers 00, 0, 1, 2 ... 35, 36. The...
-
Which financial statement presents information related to changes in retained earnings and share repurchase?
-
Discuss the usefulness of the SEC requirement in the United States to provide a management discussion and analysis of the financial statements.
-
You are part of a design team for future exploration of the planet Mars, where g = 3.7 m/s2. An explorer is to step out of a survey vehicle traveling horizontally at 33 m/s when it is 1200 m above...
-
The stockholders' equity accounts of Flounder Corporation on January 1, 2022, were as follows. Preferred Stock (8%, $48 par, 11,000 shares authorized) Common Stock ($1 stated value, 1,950,000 shares...
-
Your client, Leona Ledford, was personally served with a summons and complaint on October 23 in the case of Masters v Ledford Her answer is due in 30 days. You will mail the answer to the court. What...
-
2. (10 points) Two suppliers of products are available to supply the needs of four supermarkets. Each supplier can provide 90 units per day. Each supermarket would like to receive 60 units per day....
-
Global Cash Company Cost Incurred: Calculate Period total cost. Please show each steps) Commercial/ adver. Expenses: 10,000 Office exp: 8,000 Office Salaries: 3,000 Indirect Labor: 5,000 Direct...
-
A company produces customary products as per the specifications of its customers wish. The cost for unit one, variable cost amounts to 4,000, labor cost 2,000 (40 hrs. @ rate of 50 hour). LC ratio...
-
37. Electric field at a far away distance r on the axis of a dipole is Eo. What is the electric field at a distance 2r on perpendicular bisector? (1) (2) Eo Eo (3) (4) 16 16 8 38. What is the...
-
Celebrity Co.'s pretax GAAP for the current year is 110,000. Nondeductible fines of $2,000 are included in pretax GAAP income. Tax depreciation in excess of GAAP amounted to 25,000 and there were...
-
Comfort Manufacturing is a small textile manufacturer using machine-hours as the single indirect-cost rate to allocate manufacturing overhead costs to the various jobs contracted during the year. The...
-
Am New To Cisco Packet Tracer. I Would Like Some Help With This: This Is The Network: I am new to Cisco Packet Tracer. I would like some help with this: This is the network: You have been given a...
-
The percentage of completion and completed contract methods are described in the FASB ASC. Search the codification to find the paragraphs covering these topics, cite them, and copy the results.
-
How Democratic is Georgia? County-by-county results are shown for a recent election. For your convenience, the data have been sorted in increasing order (Source: County and City Data Book, 12th...
-
Find the z value described and sketch the area described. Find z such that 55% of the standard normal curve lies to the left of z.
-
When testing , how do we decide whether to use the standard normal distribution or a Students t distribution?
-
The headquarters of Hill Crest Corporation, a pri- vate company with $15.5 million in annual sales, is located in California. Hill Crest provides for its 150 clients an online legal software service...
-
Transferring people from job to job within the organization is the philosophy at Arcadia Plastics. Management feels that job rotation deters employees from feeling that they are stagnating in their...
-
Gustave, CPA, during its preliminary review of the financial statements of Comet, Inc., found a lack of proper segregation of duties between the programming and operating functions. Comet owns its...
Study smarter with the SolutionInn App