Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets:. What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hint: Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. What is the expected return of investing equally in all three assets M, N, and O? % (Round to two decimal places.) Data table C (Click on the following icon in order to copy its contents into a spreadsheet.) States Asset M Return Probability 28% Boom 11% Normal 51% 9% Recession 21% 3% Print Asset N Return 21% 13% 1% Done Asset O Return 3% 9% 11% X

Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets:. What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hint: Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. What is the expected return of investing equally in all three assets M, N, and O? % (Round to two decimal places.) Data table C (Click on the following icon in order to copy its contents into a spreadsheet.) States Asset M Return Probability 28% Boom 11% Normal 51% 9% Recession 21% 3% Print Asset N Return 21% 13% 1% Done Asset O Return 3% 9% 11% X

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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Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: En a. What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hint Find the standard deviations of asset M and of ti assets M, N, and O. b. Could Sally reduce her total risk even more by u tandard deviation - X i Data Table a. What is the expected return of investing equally % (Round to two decimal places.) (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability Asset M Returm Asset N Retum Asset O Retum 21% 12% -2% 25% 53% Boom 10% Normal 7% 7% Recession 22% 2% 1% 10% Print Done
a. What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hint: Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O. b. Could Sally reduce her total risk even more by using assets M and N only, assets M and O only, or assets N and O only? Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability Asset M Return Boom 27% 12% Normal 53% 9% Recession 20% 0% Asset N Return 22% Asset O Return 0% 14% 9% 2% 12%
Suppose you are considering investing your entire portfolio in three assets A, B and C. You expect that after you invest, four possible mutually exclusive scenarios will occur, with associated returns (in %) for each of the three assets as listed below. The probability of each scenario is given below (Attached image). Find the expected returns and standard deviations of Asset A, B & C. (HINT: the expected return is given by the probability-weighted sum of returns in each scenario. The expected standard deviation is given by the square root of the probability-weighted sum of squared deviations from the expected return.) Is there any reason to invest in Asset A given its low expected return and high standard deviation?
Q: Suppose an investor invests her money in three different assets-lands, bonds and stocks- and three possible states can occur. The return matrix of these three assets by states is as follows: (1.05 1.52 1.37 0.90 1.20 1.10 1.02 1.24 1.16/ Do state prices exist? Is there an arbitrage portfolio? If yes, give one example. If no, explain why
Two assets, A and B, have the same expected return (10%) and the same level of risk (average). Which of the following statements is true? Select one: a. A rational investor will either put 100% of her funds into asset A or 100% of her funds into asset B because the return same but the investor will not have to track two separate investments. b. A combination of assets A and B will have the same expected return (10%) as either asset A or asset B, but may have less than average risk depending on how the cash flows from each asset move together. c. A rational investor is indifferent between investing 100% in A, 100% in B, or a combination of A and B, because the return and risk will be the same. d. A combination of assets A and B will result in the same expected return (10%) as investing 100% in A or 100% in B, but the risk will increase because now two investments are at risk.
The expected value of an investment: Answer a. Is what the owner will receive when the investment is sold b. Is the sum of the payoffs c. Is the probability-weighted sum of the possible outcomes d. Cannot be determined in advance
Benefits of diversification. What is the expected return of investing equally in all three assets M, N, and O? Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O.
There are many ways to invest money. Jaleel wonders what are the investment options he can choose from. Choose three asset classes from the list below and help Jaleel to have a closer look at each of them. You are expected to explain the unique characteristics of the asset class, their associated risks and potential returns. For each asset class, you should use one or two examples to support your explanation. Asset Class Characteristics Risk Potential Returns Example Cash Products Fixed Income Equities Currencies Derivatives
Facing the question of whether to buy and hold an asset or whether to buy one asset rather than another, which of the following factors must be considered by an individual investor? A Investor's wealth. B Expected return on one asset relative to alternative assets. C Risk of one asset relative to alternative assets. D All of the above must be considered. Which of the following is correct about the expected return on a particular asset? Question 6 options: A If the asset's beta is 1.0, then the expected return on that asset is equal to the risk-free rate of return. B If the asset's beta is zero, then the expected return on that asset is greater than the risk-free rate of return. C If the asset's beta is zero, then the expected return on that asset is equal to the risk-free rate of return. D If the asset's beta is greater than 1.0, then the…
The Billy Joe Company has a choice of two different investments that it can make today. The alternatives are: What is the Internal Rate of Return for each of the two investments?
Remember, the expected value of a probability distribution is a statistical measure of the average (mean) value expected to occur during all possible circumstances. To compute an asset's expected return under a range of possible circumstances (or states of nature), multiply the anticipated return expected to result during each state of nature by its probability of occurrence. Consider the following case: Ethan owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of Ethan's portfolio value consists of FF's shares, and the balance consists of PP's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Market Condition Strong Normal Probability of Occurrence 0.50 0.25 Falcon Freight Pheasant Pharmaceuticals 27.5% 38.5% 16.5% 22% Weak 0.25 -22% -27.5% Calculate expected…
P 9-2 Investment Scenarios (LO 9-3) Arkansas Best Freightways is considering a purchase of three different potential trucks but is uncertain of the cash inflows associated with the following investment scenarios. Year Year 0 (today) Year 1 Year 2 Year 3 Year 4 Buy new truck Increased profits Increased profits Increased profits Increased profits Investment 1 (85,000) 25,000 25,000 25,000 25,000 Investment 2 (105,000) 20,000 30,000 40,000 50,000 Investment 3 (125,000) 40,000 30,000 20,000 10,000

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