Question
Assume that risk free (money market fund) pays 1.0% and that the margin borrowing rate (should you need to borrow) is 7%. Further, the Market
Assume that risk free (money market fund) pays 1.0% and that the margin borrowing rate (should you need to borrow) is 7%. Further, the Market Expected Return is 10%.
Your task is to:
-
Part I
Select any two of these stocks, and calculate the most efficient portfolio (on a mean/variance basis) that you can create by using JUST THOSE TWO ASSETS .
a) Select two stocks - you may DELETE the rest. Delete the columns in the data file so you don't get confused. SHOW WHICH stocks you chose!
b) What is (i.e., calculate) the BETA of each stock?
c) Use the One Factor Index Model (CAPM) to estimate the expected return of each. That is, use CAPM's Security Market Line equation to calculate the required rate of return, and assume that the Market is in equilibrium.
d) What is the weight of each (of your two) stock in the optimal portfolio?
e) What are the characteristics in expected return and in standard deviation of the optimal portfolio (of your two stocks)?
-
Part II
You have a client who wishes to have a portfolio with a rate of return of (expected) 10%. What mix of two of your two stocks and of money market funds (paying 1%) or margin borrowing (cost = 7%) would you recommend?
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