Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

K. Assume that security returns are generated by the single index model R = 0; + ARM+& where R; is the excess return for security

image text in transcribed

K. Assume that security returns are generated by the single index model R = 0; + ARM+& where R; is the excess return for security i and Ry is the markets excess return. Suppose also that there are three securities A, B, and C characterized by the following data: 8(E) Security A B Beta 0.8 1.0 1.2 Expected Return 0.10 0.12 0.14 0.05 0.01 0.10 A.) (5 points) If ox=0.04 calculate the variance (e.g. the total risk) of returns of securities A, B, and C. B.) (5 points) Now assume there are an infinite number of assets with the return characteristics identical to those of A, B, and C, respectively. If one forms a well-diversified portfolio of type A securities, what will be the variance of the portfolio's return? Similarly, what will the variance of the portfolio's return for portfolios formed only from type B? type C? K. Assume that security returns are generated by the single index model R = 0; + ARM+& where R; is the excess return for security i and Ry is the markets excess return. Suppose also that there are three securities A, B, and C characterized by the following data: 8(E) Security A B Beta 0.8 1.0 1.2 Expected Return 0.10 0.12 0.14 0.05 0.01 0.10 A.) (5 points) If ox=0.04 calculate the variance (e.g. the total risk) of returns of securities A, B, and C. B.) (5 points) Now assume there are an infinite number of assets with the return characteristics identical to those of A, B, and C, respectively. If one forms a well-diversified portfolio of type A securities, what will be the variance of the portfolio's return? Similarly, what will the variance of the portfolio's return for portfolios formed only from type B? type C

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_2

Step: 3

blur-text-image_3

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

Intermediate Financial Management

Authors: Eugene BrighamPhillip Daves

1st Edition

0324594712, 9780324594713

More Books

Students also viewed these Finance questions