If the simple CAPM is valid and all portfolios are priced correctly, which of thesituations below is possible? Consider each situation independently, and assume therisk-free rate is 5%.A)PortfolioAMarketB)AMarketPortfolio Expected ReturnAMarketExpected ReturnD)15%15%Portfolio Expected ReturnPortfolio20%15%20%15%Expected ReturnA30%Market 15%All options are possible.Option AOption DOption BOption C1.21.0Beta1.21.0Beta12%20Beta2.51.0Beta

Capital Asset Pricing Model:It is a financial model that estimates an investment's or asset's…

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A) Portfolio A Market B) Portfolio Portfolio Expected Return A Market A Market D) Expected Return Portfolio 15% 15% 20% 15% Expected Return 20% 15% Expected Return A 30% Market 15% All options are possible. Option A Option D Option B Option C Beta 1.2 1.0 Beta 12% 20 Beta 1.2 1.0 2.5 1.0 Beta

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A) Portfolio A Market B) Portfolio Portfolio Expected Return A Market A Market D) Expected Return Portfolio 15% 15% 20% 15% Expected Return 20% 15% Expected Return A 30% Market 15% All options are possible. Option A Option D Option B Option C Beta 1.2 1.0 Beta 12% 20 Beta 1.2 1.0 2.5 1.0 Beta

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2P: APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free...

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If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk - free rate is 5%. A) Portfolio Expected Return Beta A 15 % 1.1 Market 15 % 0.9 B) Portfolio Expected Return Standard Deviation A 18 % 11 % Market 13 % 19 % C) Portfolio Expected Return Beta A 18 % 1.1 Market 13 % 1.0 D) Portfolio Expected Return Beta A 29.0 % 2.4 Market 15 % 1.0
APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
Consider the following information for four portfolios, the market, and the risk-free rate (RFR): Portfolio Return Beta SD A1 0.15 1.25 0.182 A2 0.1 0.9 0.223 A3 0.12 1.1 0.138 A4 0.08 0.8 0.125 Market 0.11 1 0.2 RFR 0.03 0 0 Refer to Exhibit 18.6. Calculate the Jensen alpha Measure for each portfolio. a. A1 = 0.014, A2 = -0.002, A3 = 0.002, A4 = -0.02 b. A1 = 0.002, A2 = -0.02, A3 = 0.002, A4 = -0.014 c. A1 = 0.02, A2 = -0.002, A3 = 0.002, A4 = -0.014 d. A1 = 0.03, A2 = -0.002, A3 = 0.02, A4 = -0.14 e. A1 = 0.02, A2 = -0.002, A3 = 0.02, A4 = -0.14
If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A) Expected Portfolio Return. 18% 18% A Market (8) Expected Standard Portfolio Return Deviation 219 168 A Market C) Expected Portfolio Return 218 168 A Market D) Portfolio A Market Beta 1.1 1.0 Expected Return 27.14 18% 118 198 Beta 1.1 1.0 Beta 1.7 1.0
Assume the APT equation for portfolios A and B with the following system of equations: E[rA] = λ0 + (λ1)3 + (λ2)0.2 = 11.0 E[rB] = λ0 + (λ1)2 + (λ2)1 = 13.0 Assume the following: . The risk free rate is λ0 = Rf = 5 . The expected return on the market portfolio is RM = 10 . Expected returns are consistent with the CAPM. . (hint: note that λ1 = E[RA] − Rf and λ2 = E[RB] − Rf ). Answer the following: (a) What are λ1 and λ2? (b) What is the CAPM β associated with the pure portfolio associated with factor 1? (c) What is the CAPM β associated with the pure portfolio associated with factor 2?
Use the following CAPM equation for a portfolio to answer the questions that follow:E(RP) = RF + βP (RM – RF) = 1 + 0.8 (5 – 1) = 4.2% a) Is the portfolio defensive or aggressive. Why? b) If the actual portfolio return is 6%, what is the portfolio’s alpha?
Consider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%. a) According to asset i’s return forecast, calculate αi. (b) Calculate the optimal weight of combining asset i and the index portfolio M . (c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .
The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 o(R) 0.4 0.45 [H]Z 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. Figure (1) shows an investor with a conservative investment behavior. In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. 0.15 Figure 2 0.2 0.25 o (R) 0.3 0.35 0.4 0.45
Example of CAPM Equation: Case Risk free Rate (Rf) Market return (Km) Beta (b) Required Return A 5% 8% 1.30 ? B 8% 13% 0.90 ? C 10% 15% -0.20% ? D ? 12% 1.0 12% E 6% ? 0.60 9% F 5% 16% ? 10% Required: Using CAPM equation, compute the missing value (?)
Find a portfolio with payoff at time T equal to if 0 ≤ S(T) ≤ 10, if 10 ≤S(T) ≤ 30, if 30 ≤S(T). VT = 2ST + 30, -3ST+80, ST-40, Here, ST denotes the price of the underlying asset at time T. You can hold cash, the asset, calls, and puts.
Consider the multifactor model APT with three factors. Portfolio A has a beta of 0.8 on factor 1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3. The risk premiums on the factor 1, factor 2, and factor 3 are 3%, 5%, and 2%, respectively. The risk-free rate of return is 3%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. A. 23.0% B. 16.5% C. 13.4% D. 13.5%
You are given the following Information concerning three portfollos, the market portfolio, and the risk-free asset Portfolio Rp Op X 13.0% Y 12.0 Z Market Risk-free 7.2 11.0 5.6 24 ཝིཙྪཱཙྪལ༤ 39% 1.75 1.30 .85 1.00 0 What are the Sharpe ratio, Treynor ratio, and Jensen's alpha for each portfolio? (A negative value should be Indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round Intermediate calculations. Round your ratio answers to 5 decimal places. Enter your alpha answers as a percent rounded to 2 decimal places.) Portfolio Sharpe Ratio Treynor Ratio Jensen's Alpha X % Y % Z % Market %