Assume a risk-free rate of 10%, borrowing rate of 15%, risky asset return of 10%, and standard deviation of 20% for the risky asset returns. Sketch a graph of the CAL. Label axes. At what level of risk aversion (A), would an investor choose to borrow.
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Assume a risk-free rate of 10%, borrowing rate of 15%, risky asset return of 10%, and standard deviation of 20% for the risky asset returns. Sketch a graph of the CAL. Label axes. At what level of risk aversion (A), would an investor choose to borrow.
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- Suppose the estimated linear probability model used by an FI to predict business loan applicant default probabilities is PD = .03X1+ .02X2 - .05X3+ error, where X1 is the borrower's debt/equity ratio, X2is the volatility of borrower earnings, and X3= 0.10 is the borrower’s profit ratio. For a particular loan applicant, X1= 0.75, X2= 0.25, and X3= 0.10. Required: What is the projected probability of default for the borrower? What is the projected probability of repayment if the debt/equity ratio is 2.5?A. Briefly explain three risk exposures that an analyst should report as part of anenterprise risk management system.Page 4 of 10B. Define market risk and the economic parameters considered when calculatingmarket risk.C. Explain the concept of ‘beta’ within the framework of the Capital Asset PricingModel (CAPM). Discuss the relevance of the covariance between assets returnsfor an investor wishing to diversify the risk of a portfolioUsing the data generated in the attached picture: Plot the Security Market Line (SML) Superimpose the CAPM’s required return on the SML Indicate which investments will plot on, above and below the SML? If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph.
- Which one of the following is the formula that explains the relationship between the expected returnon a security and the level of that security's systematic risk?Select one:a. Time value of money equationb. Unsystematic risk equationc. Expected risk formulad. Market performance equatione. Capital asset pricing modelb. Suppose that you have the following information of three risky assets. Security Return (%) Standard Covariance with Deviation (%) A B A 11 10 4 14 6. 30 17 Risk free rate = 6%, (assume that A = 6). Requirement: Find the optimal portfolio weight of risky assets. How do you allocate the capital between optimal portfolio of risky asset and risk-free assets.Consider 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.
- a) Consider two assets with the following characteristics: Expected return of asset 1 = 0.15, Standard deviation of asset 1 = 0.10, portion in asset 1 = 0.5 Expected return of asset 2 = 0.20, Standard deviation of asset 2 = 0.20, Compute the expected return and standard deviation of portfolio if correlation coefficient (r1,2) = 0.40 and (r1,2)= -0.60 b) Why do most investors hold diversified portfolio?Supposing the return from an investment has the following probability distribution Return Probability R (%) 8 0.2 10 0.2 12 0.5 14 0.1 Required: What is the expected return of the investment? What is the risk as measured by the standard deviation of expected returns?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 (
- What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (SDi), covariance (COVij), and asset weight (Wi) are as shown below? Asset (A) E(R₁) = 10% SDA = 8% WA = 0.25 COVAB = 0.006 Asset (B) E(R₂) = 15% SDB = 9.5% WB = 0.75Which of the following statements regarding non-systematic risk, systematic risk and total risk is/are true? Select one or more:a. As the number of assets within a portfolio increases, the total risk of a portfolio will go to zero.b. A riskfree asset must have zero non-systematic risk.c. A well diversified portfolio must have zero systematic riskd. Under the Capital Asset Pricing Model (CAPM).an asset with zero systematic risk must have expected return equal to the riskfree rate.At a minimum, which of the following would you need to know to estimate the amount of additional reward you will receive for purchasing a risky asset instead of a risk-free asset? 1. I. Asset's standard deviation 2. II. Asset's beta 3. III. Risk-free rate of return 4. IV. Market risk premium I, III, and IV only I, II, III, and IV I and III only II and IV only III and IV only ооо O