Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio X Y z Expected return

image text in transcribed

Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio X Y z Expected return 7.5% 5% 10% Standard deviation 5% 10% 15% answer. a) Explain why beta is the appropriate measure of risk in this world. (5 marks) b) Portfolio Y is known to be uncorrelated with the market. Explain why this property implies that the risk-free rate in the economy is 5%. (5 marks) c) It is known that one of the portfolios X, Y, Z lies on the efficient frontier (which includes the risk-free asset). Which portfolio is efficient? Explain/justify your (5 marks) d) An investment manager approaches you and offers you an investment product with a claimed expected return of 12% and standard deviation of 20%. Should you accept this investment? Why/why not? If not, show how the manager can optimally create a portfolio with an identical return volatility to his proposed portfolio but with a superior expected return. Illustrate your answer graphically, making sure to label all relevant elements of your picture. (6 marks) e) Consider an investor who invests $50,000 in a portfolio consisting of X and Z. $10,000 of that investment was funded with risk-free borrowing. The expected return of the investor's portfolio is 9.375%. Calculate the dollar amounts invested in each of X and Z. (4 marks) If the correlation between X and Z is 2/3, what is the standard deviation of the investor's portfolio? (2 marks) f) Show that any portfolio on the Capital Market Line (CML) with a positive weight in the market portfolio is perfectly correlated with the market portfolio. Interpret this (6 marks) i. result. Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio X Y z Expected return 7.5% 5% 10% Standard deviation 5% 10% 15% answer. a) Explain why beta is the appropriate measure of risk in this world. (5 marks) b) Portfolio Y is known to be uncorrelated with the market. Explain why this property implies that the risk-free rate in the economy is 5%. (5 marks) c) It is known that one of the portfolios X, Y, Z lies on the efficient frontier (which includes the risk-free asset). Which portfolio is efficient? Explain/justify your (5 marks) d) An investment manager approaches you and offers you an investment product with a claimed expected return of 12% and standard deviation of 20%. Should you accept this investment? Why/why not? If not, show how the manager can optimally create a portfolio with an identical return volatility to his proposed portfolio but with a superior expected return. Illustrate your answer graphically, making sure to label all relevant elements of your picture. (6 marks) e) Consider an investor who invests $50,000 in a portfolio consisting of X and Z. $10,000 of that investment was funded with risk-free borrowing. The expected return of the investor's portfolio is 9.375%. Calculate the dollar amounts invested in each of X and Z. (4 marks) If the correlation between X and Z is 2/3, what is the standard deviation of the investor's portfolio? (2 marks) f) Show that any portfolio on the Capital Market Line (CML) with a positive weight in the market portfolio is perfectly correlated with the market portfolio. Interpret this (6 marks) i. result

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fraud Analytics Strategies And Methods For Detection And Prevention

Authors: Delena D. Spann

1st Edition

111823068X, 978-1118230688

More Books

Students also viewed these Accounting questions

Question

=+21-4 Explain how we sense our body's position and movement.

Answered: 1 week ago

Question

6. Identify characteristics of whiteness.

Answered: 1 week ago

Question

e. What are notable achievements of the group?

Answered: 1 week ago