Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Returns on Alternative Investments State of the Economy T - Bills High Tech Collections U . S . Rubber * Market portfolio 2 - Stock
Returns on Alternative Investments
State of the Economy TBills High Tech Collections US Rubber Market portfolio Stock Portfolio
Probability
Recession
Below avg.
Average
Above avg.
Boom
Expected Return
Standard Deviation
Coefficient of Variation
Sharpe ratio
Beta
Suppose you created a stock portfolio by investing $ in High Tech and $ in Collections. Calculate the expected return, the standard deviation, the coefficient of variation, and the Sharpe ratio for this portfolio, and fill in the appropriate blanks in the table.
weight in High Tech
weight in Collections
State of the economy Port. return
Recession
Below average
Average
Above average
Boom
Portfolio return
Port. std dev
Port. CV
Port. Sharpe ratio
Correlation
High TechCollections Portfolio
in HT Exp. ret. Std dev.
Using data from number : The yield curve is currently flat; that is longterm Treasury bonds also have a yield. Consequently, Merrill Finch assumes that the riskfree rate is Write out the SML equation, use it to calculate the required rate of return on each alternative.
Riskfree rate Riskfree rate
Mkt return: rM RPM
RPM: rM rRF Beta CAPM
rHT
rM
rUSR
rTbill
rColl
Beta rs
How do the expected rates of return compare with the required rates of return?
Security Exp. Ret. Req. Ret. Conclusion
High Tech
Market
US Rubber
TBills
Collections
beta p
rP
For a portfolio consisting of High Tech and US Rubber?
beta p
rP
Suppose investors raised their inflation expectations by percentage points over current estimates as reflected in the riskfree rate. What effect would higher inflation have on the SML and on the returns required on high and lowrisk securities
Suppose instead that investors risk aversion increased enough to cause the market risk premium to increase by percentage points. Inflation remains constant. What effect would this have on the SML and on returns of high and lowrisk securities
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started