Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Related questions
Question
During a particular investment period, a wealth management company held an investment portfolio that earned an average return of 13% with standard deviation of 30% and beta of 1.5. The average risk-free
(a) Calculate the Sharpe and Treynor measures of performance evaluation for this investment portfolio.
This investment portfolio is composed of the following two asset classes:
|
Asset Class |
Weight |
Return |
|
Equity |
0.80 |
15% |
|
Bonds |
0.20 |
5% |
During this particular investment period, the information on a benchmark portfolio is given in the following table.
|
Asset Class |
Weight |
Return |
|
Equity (S&P500 Index) |
0.50 |
17% |
|
Bonds (Lehman Brothers Index) |
0.50 |
5% |
(b) Determine whether the investment portfolio of the wealth management company performed better than the benchmark portfolio in terms of the total excess return on the investment portfolio over the benchmark portfolio.
(c) How much is the contribution of asset allocation across asset classes to the total excess return of the investment portfolio held by the wealth management company?
(d) How much is the contribution of security selection to the total excess return of the investment portfolio held by the wealth management company?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by stepSolved in 3 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The following data are available relating to the performance of Tiger Fund and the market portfolio: Tiger Market Portfolio Average return 18 % 15 % Standard deviations of returns 25 % 20 % Beta 1.25 1.00 Residual standard deviation 2 % 0 % The risk-free return during the sample period was 7%.Calculate Sharpe's measure of performance for Tiger Fund.arrow_forwardConsider an equal-weighted portfolio that comprises two assets: A and B. The monthly 20. returns for each asset for the first four months of the year are given below. Month 1 Month 2 Month 3 Month 4 Asset A return 5% -2% -3% -6% Asset B return 4% 1% ? 2% If the effective annual rate of return on the equal- weighted portfolio calculated from the geometric sum of monthly portfolio returns is 13.49%, what is the Month 3 return for asset B? Please explain in detail the rationale behind each step.arrow_forwardWe have three assets A1, A2, A3 and the following information: E(r1)=15%, σ1=12%,; E(r2)=19% and risk σ2=30%; E(r3)=25% and Risk σ3=35% a) Calculate the effective diversification between A1, A2, A3, and assume ρ12=ρ13=ρ23=0, the expected returns are i.17%, ii.11%arrow_forward
- Solve step by steparrow_forwardBased on the following numbers, calculate the firm’s WACC, explaining in detail each step in your calculations and the formulas that you are using. You may find it useful to complete this task in Excel and include the Excel table in your response. Cost of debt (averaging over all the forms of debt used): 12%. Risk-free rate on Treasury Bonds: 5%. Expected return on the domestic portfolio: 9%. Effective tax rate: 20%. Share of debt in optimal capital structure: 65%. Share of equity in optimal capital structure: 35%. Beta: 1.2arrow_forwardAs the chief investment officer for a money management firm specializing in taxable individual investors, you are trying to establish a strategic asset allocation for two different clients. You have established that Ms. A has a risk-tolerance factor of 8, while Mr. B has a risk-tolerance factor of 27. The characteristics for four model portfolios follow: ASSET MIX Portfolio Stock Bond ER σ2 1 6 % 94 % 9 % 6 % 2 25 75 10 10 3 67 33 11 14 4 88 12 12 24 Calculate the expected utility of each prospective portfolio for each of the two clients. Do not round intermediate calculations. Round your answers to two decimal places. Portfolio Ms. A Mr. B 1 2 3 4 Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B? Portfolio represents the optimal strategic allocation for Ms. A. Portfolio is the optimal allocation for Mr. B. For Ms. A, what level of…arrow_forward
- Consider a position consisting of 200,000 investment in asset A and 300,000 investment in asset B. Assume that the daily volatility of the assets are 1.5% and 1.8% respectively, and that coefficient of correlation between their returns is 0.4. What is the five day 95% VAR for the portfolio (given 95% confidence level represents 1.65 standard deviations on the left side of the normal distribution)?arrow_forwardYou have been asked for your advice in selecting a portfolio of assets and have been supplied with the following data:. You have been told that you can create two portfolios-one consisting of assets A and B and the other consisting of assets A and C-by investing equal proportions (50%) in each of the two component assets. a. What is the average expected return, r, for each asset over the 3-year period? b. What is the standard deviation, s, for each asset's expected return? c. What is the average expected return, rp, for each of the portfolios? d. How would you characterize the correlations of returns of the two assets making up each of the portfolios identified in part c? e. What is the standard deviation of expected returns, Sp, for each portfolio? f. What would happen if you constructed a portfolio consisting of assets A, B, and C, equally weighted? Would this reduce risk or enhance return?arrow_forwardAssume the market return is 14% with a standard deviation of 20%, and risk-free rate is 8%. The average annual returns for Managers D, E, and F are 13%, 17%, and 16% respectively. The corresponding standard deviations are 18%, 22%, and 23%. What are the Sharpe ratios for the market and managers?arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education