In this problem we assume that the annual expected rate of return of the market portfolio is 22%and the annual risk-free rate is 2%. The standard deviation of the market portfolio returns is 22%.Assume the market is in equilibrium such that the Capital Asset Pricing Model (CAPM) holds: themarket portfolio is efficient.If you have $1,000 to invest, how should you allocate it to achieve an annual expected return of26%?Invest $260 in the risk-free asset and $740 in the market portfolioInvest $800 in the risk-free asset and $200 in the market portfolioInvest $1,200 in the risk-free asset and sell short $200 in the market portfolioBorrow $260 at the risk-free rate and invest $1,260 in the market portfolioInvest $200 in the risk-free asset and $800 in the market portfolioBorrow $200 at the risk-free rate and invest $1,200 in the market portfolio

The capital asset pricing model aids analysts and investors in calculating the expected return on…

Answered: If you have $1,000 to invest, how…

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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The risk-free rate is currently 3.3%, and the market return is 14.8%. Assume you are considering the following investments: Investment Beta A 1.54 B 1.16 C 0.51 D 0.11 E 2.14 . a. Which investment is most risky? Least risky? b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments. c. Find the security market line (SML), using your findings in part b. d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.
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. (b) Draw the security market line, showing the positions of stocks A and B, as well as the risk-free rate and the market portfolio on the plot. You are not required to draw the security market line to scale. (c) Consider stock C that has an expected return of 30%, a beta of 2.3, and a standard deviation of returns of 20%. According to the CAPM, calculated in part (a) above, is stock C overpriced, underpriced, or correctly priced? What would you recommend to investors? (d) Briefly explain the definition of market portfolio in a CAPM economy
You are told that the expected return of the market portfolio is 10%, and its standard deviation is 10%. There exists a risk-free asset in the economy. You hold an efficient portfolio with an expected return of 12% and a standard deviation of 15%. [hint: The efficient portfolio is a combination of the market portfolio and the risk-free asset.] (1) In forming this efficient portfolio do you borrow or lend? Support your answer with relevant calculations. (2) What is the risk-free rate?
Suppose there is a risk-free asset whose return is 2% and that the market portfolio has an expected return of 10%. The standard deviation of the market portfolio is given 25%.(a) Find the security market line.(b) Suppose there is an asset whose covariance with the market is given by 450%^2. Find its equilibrium price according to CAPM.
Given the current risk-free rate is 9% and the market return is 12%. TI Investment Beta A 0.65 1.12 C 0.87 1.19 E 0.56 Calculate the required rate of return for each of the investments by using the Capital Asset Pricing Model (CAPM). ii. i. If you invest an equal amount in each investment, what is the portfolio beta?
Suppose the risk-free rate is 6 percent and the market portfolio has an expected return of 12 percent. The market portfolio has a standard deviation of 7 percent. Portfolio Z has a correlation coefficient with the market of 0.35 and standard deviation of 6 percent. According to the capital asset pricing model, what is the expected return on portfolio Z a. 12.6 percent b. 7.8 percent c. 9.87 percent d. 12.05 percent
Suppose there is a risk-free asset whose return is 2% and that the market portfolio has an expected return of 10%. The standard deviation of the market portfolio is given 25% 1). Consider an asset that currently sells for $30 and has βi = 0.6. Suppose the asset pays a dividend of $1.5 and the expected price at the end of the period is $30.5. Calcuate the α of this asset. Is it over- or underpriced?2). Consider an asset with βi = 1.25 and expected return of 11%. Can an investor use this asset to make a risk-free profit through arbitrage? Explain your answer
a) Suppose the risk-free rate is 1% and the expected rate of return on the market portfolio is 10%. In your view, the expected rate of return of a security is 12.2%. Given that this security has a beta of 1.4, do you consider it to be overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model? Please provide the details of your calculations and discuss your results
Use the basic equation for the capital asset pricing model (CAPM) to find therequired return for an asset with a beta of 2.20 when the risk-free rate and market return are 8% and12%, respectively.
consider the following data for a single factor model economy. all portfolios are well diversified. suppose portfolio p has an expected return of 19% and beta of 2.0. portfolio m has an expected retrun of 12% and beta of 1.0. assume that the risk free rate is 7% and that arbitrage opportunities exist. what is the portfolio p's alpha?
The Treasury bill rate is 6%, and the expected return on the market portfolio is 14%. According to the capital asset pricing model: a. What is the risk premium on the market?b. What is the required return on an investment with a beta of 1.4? c. If an investment with a beta of 0.6 offers an expected return of 8.4%, does it have a positive or negative NPV?d. If the market expects a return of 11.6% from stock X, what is its beta?
Consider a single-index model economy. The index portfolio M has E(RM ) = 6%, σM = 18%.An individual asset i has an estimate of βi = 1.1 and σ2ei = 0.0225 using the single index modelRi = αi + βiRM + ei. The forecast of asset i’s return is E(ri) = 12%. rf = 4%. a) According to asset i’s return forecast, calculate αi. (b) Calculate the optimal weight of combining asset i and the index portfolio M . (c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combiningasset i and the index portfolio M .

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