Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 6%, and all stocks have independentfirm-specific components with a standard deviation of 54%. Portfolios A and B are both well diversified.Portfolio Beta on M₁1.71.98Beta on M₂2.0-0.8Expected Return (%)3314Required:What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round youranswers to 2 decimal places.)Expected return-beta relationship (fp)6.00 % +7.28 Bp1+7.31 Bp2

According to CAPMExpected return =

Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 54% Portfolios A and B are both well diversified. Portfolio Beta on M₁ 1.7 1.9 Beta on M₂ 2.0 -0.8 Expected Return (%) 33 14 Required: What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return-beta relationship E(fp) = 6.00 % + 7.28 Pp₁+ 7.31 PP2

Suppose there are two independent economic factors, M₁ and M₂. The risk-free rate is 6%, and all stocks have independent firm-specific components with a standard deviation of 54% Portfolios A and B are both well diversified. Portfolio Beta on M₁ 1.7 1.9 Beta on M₂ 2.0 -0.8 Expected Return (%) 33 14 Required: What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return-beta relationship E(fp) = 6.00 % + 7.28 Pp₁+ 7.31 PP2

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.10P

See similar textbooks

Similar questions

John Davidson is an investment adviser at Leeds Asset Management plc. He is asked by a client to evaluate various investment opportunities currently available and he has calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets: Portfolio Expected return Standard deviation Q 7.8% 10.5% R 10.0% 14.0% S 4.6% 5.0% T 11.7% 18.5% U 6.2% 7.5% (a) For each portfolio, calculate the risk premium per unit of risk (Sharpe ratio) that you expect to receive. Assume that the risk-free rate is 3.0%. (b) If you are only willing to make an investment with a standard deviation of 7.0%, is it possible for you to earn a return of 7.0%? (c) What is the minimum level of risk that would be necessary for an investment to earn 7.0%? What is the composition of the portfolio along the Capital Market Line (CML) that will generate that expected return?
The value of Jon’s stock portfolio is given by the function v(t) = 50 + 77t + 3t2, where v is the value of the portfolio in hundreds of dollars and t is the time in months. How much money did Jon start with? (y-intercept) What is the minimum value of Jon’s portfolio? (vertex)
Two stocks are available. The corresponding expectedrates of return are r¯1 and r¯2; the corresponding variances and covariances areσ12, σ22, and σ12. What percentages of total investment should be invested ineach of the two stocks to minimize the total variance of the rate of return ofthe resulting portfolio? What is the mean rate of return of this portfolio?
QUESTION 1 Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. Compute the standard deviation of the returns on the portfolio assuming that the two stocks' returns are uncorrelated. 17.4%. 27.4%. 7.4%. 11.4%. QUESTION 2 Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases. The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases. The standard deviation of the portfolio returns increases as the coefficient…
You plan to invest $1,000 in a corporate bond fund or in a common stock fund. The following table represents the annual return (per $1,000) of each of these investments under various economic conditions and the probability that each of those economic conditions will occur. Compute the expected return for the corporate bond and for the common stock fund. Show your calculations on excel for expected returns. Compute the standard deviation for the corporate bond fund and for the common stock fund. Would you invest in the corporate bond fund or the common stock fund? Explain. If choose to invest in the common stock fund and in (c), what do you think about the possibility of losing $999 of every $1,000 invested if there is depression. Explain.
Given the following information, what is the standard deviation of the returns on a portfolio that is invested 35 percent in both Stocks A and C, and 30 percent in Stock B? (see attached chart)
Elizabeth has decided to form a portfolio by putting 30% of her money into stock 1 and 70% into stock 2. She assumes that the expected returns will be 10% and 18%, respectively, and that the standard deviations will be 15% and 24%, respectively. Describe what happens to the standard deviation of the portfolio returns when the coefficient of correlation ρ decreases. The standard deviation of the portfolio returns decreases as the coefficient of correlation decreases. The standard deviation of the portfolio returns increases as the coefficient of correlation increases. The standard deviation of the portfolio returns decreases as the coefficient of correlation increases. The standard deviation of the portfolio returns increases as the coefficient of correlation decreases.
Suppose the expected return on the tangent portfolio is 12% and its volatility is 30%.The risk-free rate is 3%.(a) What is the equation of the Capital Market Line (CML)?(b) What is the standard deviation of an efficient portfolio whose expected return of16.5%? How would you allocate $3,000 to achieve this position
Consider an economy where Capital Asset Pricing Model holds. In this economy, stocks A and B have the following characteristics: • Stock A has and expected return of 22% and a beta of 2. • Stock B has an expected return of 15% and a beta of 0.8. The standard deviation of the market portfolio’s return is 18%. (a) Assuming that stocks A and B are correctly priced according to the CAPM, compute the risk-free rate and the market risk premium.
A maximizing investor with preferences u(u, o) = 0.2u – 0.50^2 will allocate a portfolio worth 4000 between a risk free asset with a return of 4 percent and the market asset with a return of 20 percent and risk of 4 percent. How many dollars should be invested in the market asset? %3D
Studies have concluded that a college degree is a very good investment. Suppose that a college graduate earns about 79% more money per hour than a high-school graduate. If the lifetime earnings of a high-school graduate average $1,070,000, what is the expected value of eamings of a college graduate? The expected value of earnings of a college graduate is $. (Round to the nearest whole dollar.)
Suppose stock returns can be explained by the following three-factor model: R=RF+ B1F+B2F2-B3F3 Assume there is no firm-specific risk. The information for each stock is presented here: ẞ1 B2 ẞ3 Stock A 1.75 Stock B .82 Stock C .83 .75 $.50 1.35 -.70 -.33 1.44 The risk premiums for the factors are 7.1 percent, 6.3 percent, and 6.7 percent, respectively. You create a portfolio with 20 percent invested in Stock A, 20 percent invested in Stock B, and the remainder in Stock C. The risk-free rate is 4.2 percent. What is the beta for each factor for the return on your portfolio? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Factor F1 Factor F2 Factor F3 What is the expected return on your portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return %