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Assume

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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Question

Assume that the return volatility for asset 1 and 2 is 0.2 and 0.3 respectively and the return correlation is 0.7. The portfolio volatility is

a) 2.5

b) 3.0

c) 3.5

d) 4

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2. Suppose that you have a riskfree asset and N risky assets for investment. The rate of return on the riskfree asset is r,, while the (Nx1) vector of the rate of return on the N risky assets is r, which is multivariate normal, i.e., r N(u, E). Your utility function for a portfolio that consists of the riskfree asset and the N risky asset is u(r,)=r,-=o, 2 Suppose that the sum of investment proportions on the riskfree and risky assets is one. Answer the following question. A. What is your optimal investment proportion in the risky assets? How is your investment on the riskfree asset affected by different values of 2? B. Suppose that there is only one risky asset i. Show the effects of the Sharpe ratio (4,/0, ) on the investment proportion in the risky asset.
choose which one ? 3.Assume CAPM holds. What is the correlation between an efficient portfolio and the market portfolio?a.1b.-1c.0d.Not enough information
4
b) Give a graphical example to present the positioning of. E Systematic risk E Risk free rate of returm E Market rate of return, and E Risk premium.
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?
CASE 3 (6 marks): The following graph shows the efficient frontier for the portfolio containing x, y and z securities EFFICIENT FRONTIER 0.00525 D 0.00475 В A 0.00425 W 0,00375 0.00325 0.00275 0.006 0.0065 0.007 0.0075 0.008 0.0085 op 3 а) Which combination of the portfolio is most efficient or the closest to optimal, A, B, C or D and why? Additionally, explain the difference between each of these portfolios. 3 b) If the star represents portfolio E, is it better than B? Explain why or why not. 3 c) If the triangle represents portfolio F, is it better than C? D? Explain why or why not. ERP
The CAPM states that the expected (required) return on an asset is : E(Ri)=Rf+βi[E(RM)−Rf] where the term in square brackets is the risk-premium earned by the market portfolio. Therefore, the beta of the market portfolio (βM) must be equal to __________ . A) zero B) 0.5 C) 1.0 D) an unknown estimate
2. The following table gives information on the return and variance of assets A and B, whose covariance is 0.0003: A B 0} 0,0009 0,0012 E (R₂) 0,05 0,06 a. Does the portfolio (1/3 of A and 2/3 of B) dominate the portfolio (2/3 of A and 1/3 of B)? b. Does the portfolio (1/2, 1/2) belong to the efficient frontier? c. If there were the possibility of lending and borrowing at 2%, would the portfolio (1/2, 1/2) belong to the new efficient frontier?
T/F. The “Fear Index” is calculated using estimates of implied volatility. Group of answer choices True False

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