PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 8, Problem 4PS
Portfolio risk and return Look back at the calculation for Southwest Airlines and Amazon in Section 8-1.
- a) Recalculate the expected portfolio return and standard deviation for different values of x1, and x2, assuming the correlation coefficient ρ12 = 0. Plot the range of possible combinations of expected return and standard deviation as in Figure 8.3.
- b) Repeat the problem for ρ12 = +.50.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Consider the expected return and standard deviation of the following two assets:
Asset 1: E[r1]=0.1 and σ1=0.2
Asset 2: E[r2]=0.3 and σ2=0.4
(a) Draw (e.g. with Excel) the set of achievable portfolios in mean-standard deviation
space for the cases: (i) ρ12= -1, (ii) ρ12=0.
(b) Suppose ρ12=-1. Which portfolio has the minimal variance? What is the variance and
expected return of that portfolio?
(c) Derive the formula for the variance of a portfolio with four assets.
The optimal proportion of the risky asset in the complete portfolio is
given by the equation below
y*=
E(Rp− Rf)
A0²
For each of the variables on the right side of the equation, discuss the
impact of the variable's effect on y* and why the nature of the relationship
makes sense intuitively.
Assume the investor is risk averse
Portfolio
Suppose rA ~ N (0.05, 0.01), rB ~ N (0.1, 0.04)
with pA,B = 0.2
where rA and rB are CCR’s.
a) Suppose you construct a portfolio with 50% for A and 50% for B. Find the variance of the portfolio CCR.
b) Find the portfolio expected gross return.
c) Find the expected portfolio CCR.
Chapter 8 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 8 - Efficient portfolios For each of the following...Ch. 8 - Efficient portfolios Figure 8.11 purports to show...Ch. 8 - Portfolio risk and return Look back at the...Ch. 8 - Portfolio risk and return Mark Harrywitz proposes...Ch. 8 - Portfolio risk and return Ebenezer Scrooge has...Ch. 8 - Portfolio risk and return Here are returns and...Ch. 8 - Portfolio risk and return Percival Hygiene has IO...Ch. 8 - Sharpe ratio Use the long-term data on security...Ch. 8 - Portfolio beta Refer to Table 7.5. a. What is the...Ch. 8 - CAPM True or false? Explain or qualify as...
Ch. 8 - CAPM True or false? a. The CAPM implies that if...Ch. 8 - CAPM Suppose that the Treasury bill rate is 6%...Ch. 8 - CAPM The Treasury bill rate is 4%, and the...Ch. 8 - Cost of capital Epsilon Corp. is evaluating an...Ch. 8 - APT Consider a three-factor APT model. The factors...Ch. 8 - Prob. 18PSCh. 8 - APT Consider the following simplified APT model:...Ch. 8 - Prob. 20PSCh. 8 - Three-factor modelThe following table shows the...Ch. 8 - Efficient portfolios Look again at the set of the...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The following portfolios are being considered for investment. During the period under consideration, RFR = 0.07.Portfolio Return Beta σiA 0.15 1.0 0.05B 0.20 1.5 0.10C 0.10 0.6 0.03D 0.17 1.1 0.06Market 0.13 1.0 0.04 a. Compute the Sharpe measure for each portfolio and the market portfolio. b. Compute the Treynor measure for each portfolio and the market portfolio. c. Rank the portfolios using each measure, explaining the cause for any differences you find in the rankings.arrow_forwardFill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph Please answer A, B, C & Darrow_forwardConsider the following performance data for a portfolio manager: Benchmark Portfolio Index Portfolio Weight Weight Return Return Stocks 0.65 0.7 0.11 0.12 Bonds 0.3 0.25 0.07 0.08 Cash 0.05 0.05 0.03 0.025 a.Calculate the percentage return that can be attributed to the asset allocation decision. b.Calculate the percentage return that can be attributed to the security selection decision.arrow_forward
- We consider a market with N risky assets. The following table shows the information of some portfolios constructed by these risky assets. Expected return Portfolio 1 (W₁) Portfolio 2 (W₂) Portfolio 3 (W3) Portfolio 4 (W4) 0.0321 0.0607 0.1263 0.1322 Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4 Standard deviation of the return The correlation coefficient of returns of these portfolios are given in the following table: Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4 0.731672 1 0.731672 1 0.62553 0.002018 -0.02533 0.662908 0.093207 0.088882 0.217899 0.212048 0.002018 0.62553 1 0.915149 You are also given that two of these portfolios are efficient. -0.02533 0.662908 0.915149 1 Question (a) Using the above information, determine the global minimum variance portfolio. Express your answer in terms of W₁, W2, W3 and W₁.arrow_forwardCompute the residual risk measure for portfolio A. Round off your final answer to three digits after the decimal point. Compute the appraisal ratio for portfolio B. Round off your final answer to three digits after the decimal point.arrow_forwardThe 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 0.45arrow_forward
- According to CAPM, the expected rate of return of a portfolio with a beta of 1.0 and an alpha of 0 is:a. Between rM and rf .b. The risk-free rate, rf .c. β(rM − rf).d. The expected return on the market, rM.arrow_forwardExpected retun and standard deviation. Use the following information to answer the questions: a. What is the expected return of each asset? b. What is the variance and the standard deviation c. What is the expected return of a portfolio with 1 1 Data Table d. What is the portfolio's variance and standard de - X Hint Make sure to round all intermediate calculatio Swers yo (Click on the following icon D in order to copy its contents into a spreadsheet.) a. What is the expected return of asset J? (Round to four decimal places.) Return on Return on Return on Probability of State State of Asset J in Asset Kin State 0.200 0.140 0.040 Asset L in Economy State State Вoom 0.28 0.070 0.260 0.180 Growth 0.37 0.25 0.070 Stagnant 0.070 0.060 -0.210 Recession 0.10 0.070 -0.100 Print Donearrow_forwardWhich of the following statements regarding the graph of the SML is most accurate? A Select one OA. The beta of Portfolios A, B, and C are identical as they fall directly on the line. B. The expected return of Portfolio C is the difference between the market's expected return and the risk-free rate. C. Portfolio A has lower systematic risk than Portfolio B. D. The slope of the line is the market risk premium.arrow_forward
- When working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.arrow_forwardYou are given the following information concerning three portfolios, the market portfolio, and the risk-free asset: Op 1.45 1.20 0.75 1.00 Portfolio: X Y Z Market Risk-free Rp 11.00% 10.00 8.10 10.40 5.20 Information ratio Op 33.00% 28.00 18.00 23.00 0 Assume that the tracking error of Portfolio X is 9.10 percent. What is the information ratio for Portfolio X? Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 4 decimal places. 02148 0arrow_forwardWhich of the following statements regarding the graph of the SML is most accurate? Select one O A. O B. B-1.0 The beta of Portfolios A, B, and C are identical as they fall directly on the line. The expected return of Portfolio C is the difference between the market's expected return and the risk-free rate. O C. Portfolio A has lower systematic risk than Portfolio B. OD. The slope of the line is the market risk premium.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Portfolio Management; Author: DevTechFinance;https://www.youtube.com/watch?v=Qmw15cG2Mv4;License: Standard YouTube License, CC-BY