(Using the CAPM to find expected returns) Sante Capital operates two mutual funds headquartered in Houston, Texas. The firm is evaluating the stock of four different firms for possible inclusion in its fund holdings. As part of their analysis, Sante's managers have asked their junior analyst to estimate the investor-required rate of return on each firm's shares using the CAPM and the following estimates: The rate of interest on short-term U.S. Treasury securities is currently 2.5 percent, and the expected return for the market portfolio is 10 percent. What should be the expected rates of return for each investment? Security A B Beta 1.72 0.77 ... a. The expected rate of return for security A, which has a beta of 1.72, is%. (Round to two decimal places.)

(Using the CAPM to find expected returns) Sante Capital operates two mutual funds headquartered in Houston, Texas. The firm is evaluating the stock of four different firms for possible inclusion in its fund holdings. As part of their analysis, Sante's managers have asked their junior analyst to estimate the investor-required rate of return on each firm's shares using the CAPM and the following estimates: The rate of interest on short-term U.S. Treasury securities is currently 2.5 percent, and the expected return for the market portfolio is 10 percent. What should be the expected rates of return for each investment? Security A B Beta 1.72 0.77 ... a. The expected rate of return for security A, which has a beta of 1.72, is%. (Round to two decimal places.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

(Using the CAPM to find expected returns) Sante Capital operates two mutual funds headquartered in Houston, Texas. The firm is evaluating the stock of four different firms for possible inclusion in its fund holdings. As part of their analysis, Sante's managers have asked their junior analyst to estimate the investor-required rate of return on each firm's shares using the CAPM and the following estimates: The rate of interest on short-term U.S. Treasury securities is currently 4 percent, and the expected return for the market portfolio is 10 percent. What should be the expected rates of return for each investment? Security Beta A 1.67 B 0.58 C 1.14 D 0.78 (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. The expected rate of return for security A, which has a beta of 1.67, is enter your response here%. (Round to two decimal places.) Part 2 b. The expected…
Carol Harrod is the investment officer for a $100 million U.S. pension fund. The fixed-income portion of the portfolio is actively managed, and a substantial portion of the fund’s large capitalization U.S. equity portfolio is indexed and managed by Webb Street Advisors.Harrod has been impressed with the investment results of Webb Street’s equity index strategy and is considering asking Webb Street to index a portion of the actively managed fixed-income portfolio.a. Describe the advantages and disadvantages of bond indexing relative to active bond management.b. Webb Street manages indexed bond portfolios. Discuss how an indexed bond portfolio is constructed under stratified sampling (cellular) methods.c. Describe the main source of tracking error for the cellular method.
a. A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests in stocks, bonds, short-term money market instruments and other securities. The performance of these mutual funds and the portfolio they build needs to be evaluated as frequently as possible. Evaluating the performance of these mutual funds is important for both existing and potential investors. The Table below provides the average return, standard deviation and betas of selected equity mutual funds over a period of three years. The average risk free rate for the period is estimated at 15%. Portfolio Average return Standard Deviation Beta Portfolio A 27.62 16 1.2 Portfolio B 20.12 15 0.9 Portfolio C 26.25 12 1.05 GSE return(benchmark) 16.18 10 1.0 Required:Estimate and compare the performance of the funds with the market using:i. Treynor’s measureii. Sharpe’s measureiii. Jensen’s Measure b. The issuing of security goes through a number of…
You plan to invest $1000 in a corporate bond fund or in a common stock fun. The information to the right about the annual return (per $1000) of each of these investments under different economic conditions is available, along with the probability that each of these economic conditions will occur. Complete parts (a) through (c) a. Compute the expected return for the corporate bond fund and for the common stock fund b. Compute the standard deviation for the corporate bond fund and for the common stock fund c. Would you invest in the corporate bond fund or the common stock fund? Explain.
You are tasked with comparing two Icelandic equity funds. The other fund is called the RU IS Equity Fund (RIS). The other fund is called HÍ IS Equity Fund (HIS). It is known that the funds had the following ratios in certain shares over the period 2018 to 2021 (it is not assumed that they received dividends during the period). The proportions did not change over the period. The price of individual shares over the period can be found in the red box down below the text. a) What was the average annual return of RIS and HIS over the period
An analyst with a mutual fund is considering buying an FCS Inc corporate bond. She has collected the balance sheet information and income statement info for FCS, as shown in Table 1 (values in thousands). Using the funds internal rating system, shown in Table 2, she computes a set of ratios to determine the appropriate risk premium for the bond. Table 1. Balance Sheet Income Statement Current Assets $4,735 Revenue $18,500 Fixed Assets $43,225 Operating and Admin. Expenses $14,050 Total Assets $47,960 Operating Income before D&A $4,450 Current Liabilities $4,500 Depreciation & Amortization $1,635 Long-term Debt $10,000 Interest Expense $926 Total Liabilities $14,500 EBT $1,889 Shareholder Equity $33,460 Taxes $697 Total Liabilities & Shareholder Equity $47,960 Net income $1,192 Table 2. Rating Table Bond Rating Interest Coverage Leverage Current Ratio Risk Premium AA 5.0 to 6.0 0.20 to 0.29 1.15 to 1.25 0.25% A 4.0 to 5.0 0.30 to 0.39 1.00 to 1.14 0.55% BBB 3.0 to 4.0 0.40 to 0.49 0.90…
ABC CAPITAL is a hedge fund with $300 million of initial investment capital. They charge a 2 percent management fee based on assets under management and a 20 percent incentive fee. In its first year, ABC Capital has a 20 percent return. Assume management fees are calculated using beginning-of-period valuation. 1. What are the fees earned by ABC if the incentive and management fees are calculated independently? What is an investor’s effective return given this fee Structure? 2. What are the fees earned by ABC assuming that the incentive fee is calculated based on return net of the management fee? What is an investor’s net return given this fee structure? 3. If the fee structure specifies a hurdle rate of 5 percent and the incentive fee is based on returns in excess of the hurdle rate, what are the fees earned by ABC assuming the performance fee is calculated net of the management fee? What is an investor’s net return given this fee structure? 4. In the second year, the fund value…
ABC CAPITAL is a hedge fund with $300 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, ABC Capital has a 80 percent return. Assume management fees are calculated using end-of-period valuation. 1. What are the fees earned by ABC if the incentive and management fees are calculated independently? What is an investor’s effective return given this fee Structure? 2. What are the fees earned by ABC assuming that the incentive fee is calculated based on return net of the management fee? What is an investor’s net return given this fee structure? 3. If the fee structure specifies a hurdle rate of 5 percent and the incentive fee is based on returns in excess of the hurdle rate, what are the fees earned by ABC assuming the performance fee is calculated net of the management fee? What is an investor’s net return given this fee structure? 4. In the second year, the fund…
Fund F has been investing in stocks and bonds. You are evaluating the performance of Fund F by comparing its performance with the performance of an appropriate benchmark portfolio B. The performance and weights of F and B over the last year are given in the table below: Asset Class Weight in F Weight in B 0.6 Stocks 0.5 Bonds 0.5 Attribute the performance of Fund F against benchmark portfolio B in the stock class. What is the attribution due to the asset allocation in the stock class? What is the attribution due to the security selection in the stock class? 0.4 Return from F O a. -0.005, -0.008 O b. 0.003; 0.004 O c. 0.012, 0.008 O d. 0.008; 0.012 10% Return from B 3% 8% 5%
A fund manager has been monitoring the performance of Virgin Galactic Corporation shares (NYSE: SPCE). The shares are currently trading at $34.8 on the New York stock exchange. The fund manager predicts that SPEC shares might rise in value over the next few months. He checked the market and found the related information on the options with a maturity of two months as below.Assume the number of underlying shares per contract is 100 shares. (i) Please specify the moneyness of the following options. Are they in the money, at the money or out of the money? (ii)Which option would you suggest the fund manager to purchase? Why? (iii)How much would it cost if the fund manager purchases options in (ii) that cover 1,000,000 shares (ii)?
JPMorgan Diversified Fund (JDVSX) is an investment that seeks to provide a high return from a diversified portfolio of equities and fixed-income investments. Drawing on a variety of analytical tools, the fund's adviser allocates assets from various types of equities and fixed income investments, based on the following allocation model: 30%-75% U.S. equity securities, including small, medium and large-cap securities; 25%-50% U.S. and foreign fixed income securities; and 0%-30% foreign equity securities. According to JPMorgan Funds statistics report data as of 31st December 2015, the fund strategic benchmark distributions were as follows: Strategic distribution U.S Equities 45% International Equities 20% Fixed Income 35% - Describe the risks of this type of funds, and explain the differences in risk between this institution and Microsoft. Instructions: 1) Assume that the value of the fund is $ 100 million. 2) You should calculate the…
You are an analyst for a large public pension fund and you have been assigned the task of evaluating two different external portfolio managers (Yellen and Zagami) who (actively) manage two funds which are considering. Your associates have assembled the following historical average return, standard deviation, and CAPM beta estimates for these two fund managers over the past five years. In addition, you have estimated that the risk premium for the market portfolio is 5.12% and the risk-free rate is currently 4.14%. What is Ms. Yellen's average "alpha" for the period. Report your answer in percentage format rounded to three decimal places. (For example.1234 should be entered as "12.3"). Fund Manager Actual Avg. Return Standard Deviation Ms. Yellen 11% Mr. Zagami 8.24% Answer: 11.07 8.75% Beta 1.18 0.9

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS