1. Assume a two-factor model explains stock returns. Regression estimates of stocks A and B on the two factors are given below. Stock B, в, a A 2 1.2 -0.5 4 3.5 -0.8 2.0 3 Assume further that factor one has expected return of 10 and standard deviation of 8. Factor two has expected return of 5 and standard deviation of 6. a) Calculate expected returns for A and B. b) Calculate standard deviations for A and B. c) Calculate expected return on a portfolio that invests 60% in A and 40% in B.

1. Assume a two-factor model explains stock returns. Regression estimates of stocks A and B on the two factors are given below. Stock B, в, a A 2 1.2 -0.5 4 3.5 -0.8 2.0 3 Assume further that factor one has expected return of 10 and standard deviation of 8. Factor two has expected return of 5 and standard deviation of 6. a) Calculate expected returns for A and B. b) Calculate standard deviations for A and B. c) Calculate expected return on a portfolio that invests 60% in A and 40% in B.

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

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Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 7%, and the market's average return was 14%. Performance is measured using an index model regression on excess returns. Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns. i. Alpha ii. Information ratio iii. Sharpe ratio iv. Treynor measure Stock A a. Calculate the following statistics for each stock: (Round your answers to 4 decimal places.) % Stock A 1% +1.2(rm rf) % 0.635 11.3% 22.6% Stock B % % Stock B 2% +0.8( rm -rf) b. Which stock is the best choice under the following circumstances? 0.466 20.1% 26.9% i. This is the only risky asset to be held by the investor. ii. This stock will be mixed with the rest of the investor's portfolio, currently composed solely of holdings in the market-index fund. iii. This is one of many stocks that the investor is analyzing to form an actively managed stock…
KINDLY ANSWER PART 5,6.and 7 Using the stock price data for any two companies provided below carry out the following tasks: 1.Compute, for each asset: i.Total Returns ii.Expected returns iii.standard deviation iv.Correlation Coefficient 2.Construct the variance-covariance matrix 3.Construct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 4.Reconstruct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 5.Use Solver to determine optimal risky portfolio. 6.Create hypothetical portfolios (commencing from Weight A=0 and weight B=100) 7.Calculate Expected return and Standard Deviation for all the above combinations 8.Graph the efficient frontier 9.Graph the optimal portfolio 10.Assuming that the investors prefers lower level of risk than what a portfolio of risky assets offer, introduce a risk free asset in the portfolio with a return of 3% 11.Using hypothetical weights (A= Portfolio of Risky…
Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% Calculate covariance and coefficient of correlation between the returns of thestocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfoliocomprising of $45,000 invested in stock A and remaining amount in stock B.Calculate risk and return of your portfolio.
a. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance betweenthe returns of A and B is 0.006. The correlation of returns between A and B is:
Consider the two (excess return) index model regression results for A and B. RA = 1.5% + 1.7RM R-square = 0.622 Residual standard deviation = 12% RB = -2.4 % +1.3RM R-square=0.468 Residual standard deviation = 9.8% Required: a. Which stock has more firm-specific risk? b. Which stock has greater market risk? c. For which stock does market movement explain a greater fraction of return variability? d. If rf were constant at 5.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D If rf were constant at 5.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? Note: Negative value should be indicated by a minus sign. Round your answer to 2 decimal places. Intercept %
Consider the two (excess return) index model regression results for A and B: RA = 0.8% + 1RM R-square = 0.588 Residual standard deviation = 10.8% RB = –1.2% + 0.7RM R-square = 0.452 Residual standard deviation = 9% a. Which stock has greater market risk? multiple choice A. Stock A B. Stock B b. For which stock does market movement has a greater fraction of return variability? multiple choice A. Stock A B. Stock B c. If rf were constant at 4.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 0.03 + 0.7 RM + eA RB = -0.02+ 1.2 RM + eB σM =0.20; R-square A = 0.25 R-square B = 0.20 What is the standard deviation of A & B, respectively? Group of answer choices 0.54, 0.28 0.28, 0.54 0.45, 0.50 0.50, 0.45
You run a regression for the Tesla stock return on a market index to estimate the SML equation and find the following Excel output: Multiple R R-Square Adjusted R-Square Standard Error Observations Intercept Market = 0.28 0.25 0.02 40.01 60 13.35 and 0.97 0.8 and 0.1 0.28 and 0.25 0.26 and 1.36 0.2 and 0.75 Coefficients Standard Error t-Stat p-Value 0.2 0.75 The resulting SML equation for Laternios is given by: Er Laternios] 13.35 0.26 0.80 0.97 1.36 0.10 + __ × (E[rM] - rf)
Consider the two (excess return) index model regression results for A and B: RA = 0.8% + 1RM R-square = 0.588 Residual standard deviation = 10.8% RB = –1.2% + 0.7RM R-square = 0.452 Residual standard deviation = 9% a. Which stock has more firm-specific risk? A. Stock A B. Stock B Which stock has greater market risk? A. Stock A B. Stock B b. For which stock does market movement has a greater fraction of return variability? A. Stock A B. Stock B c. If rf were constant at 4.5% and the regression had been run using total rather than excess returns, what would have been the regression intercept for stock A? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)
Consider the two (excess return) index-model regression results for stocks A and The risk-free rate over the period was 6%, and the market’s average return was 14%. Performance is measured using an index model regression on excess returns. Stock A Stock B Index model regression estimates 1% + 1.2(rM – rf ) 2% + 0.8(rM – rf ) R-square 0.576 0.436 Residual standard deviation, σ(e) 10.3% 19.1% Standard deviation of excess returns 21.6% 24.9% Calculate the following statistics for each stock: Alpha Information ratio Sharpe ratio Treynor measure Which stock is the best choice under the following circumstances? This is the only risky asset to be held by the investor. This stock will be mixed with the rest of the investor’s portfolio, currently composed solely of holdings in the market-index fund. This is one of many stocks that the investor is analyzing to form an actively managed stock portfolio.
Given the re-stated information below (and expected returns you should have already calculated), what is the correlation between Stock A and B returns? Enter correlation rounded to 4th digit, as in "0.1234"
Consider the two (excess return) index-model regression results for stocks A and B. The risk-free rate over the period was 7%, and the market's average return was 14%. Performance is measured using an index model regression on excess returns. Index model regression estimates R-square Residual standard deviation, o(e) Standard deviation of excess returns Stock A 1% +1.2(rm - rf) Stock B 2% +0.8(rm – rf) 0.635 0.466 11.3% 22.6% 20.1% 26.9% Required: a. Calculate the following statistics for each stock: b. Which stock is the best choice under the following circumstances? Complete this question by entering your answers in the tabs below. Required A Required B Calculate the following statistics for each stock: Note: Round your answers to 4 decimal places. i. Alpha ii. Information ratio iii. Sharpe ratio iv. Treynor measure Stock A Stock B % %

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