John Davidson is an investment adviser at Leeds Asset Management plc. He is asked by a client to evaluate various investment opportunities currently available and he has calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets: Portfolio Expected return Standard deviation 7.8% 10.5% R 10.0% 14.0% 4.6% 5.0% 11.7% 18.5% 6.2% 7.5% (a) For each portfolio, calculate the risk premium per unit of risk (Sharpe ratio) that you expect to receive. Assume that the risk-free rate is 3.0%. (b) Using answers from a, which of these five portfolios is most likely to be the market portfolio and explain why. (c) If you are only willing to make an investment with a standard deviation of 7.0%, is it possible for you to earn a return of 7.0%? (d) What is the minimum level of risk that would be necessary for an investment to earn 7.0%? What is the composition of the portfolio along the Capital Market Line (CML) that will generate that expected return?

John Davidson is an investment adviser at Leeds Asset Management plc. He is asked by a client to evaluate various investment opportunities currently available and he has calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets: Portfolio Expected return Standard deviation 7.8% 10.5% R 10.0% 14.0% 4.6% 5.0% 11.7% 18.5% 6.2% 7.5% (a) For each portfolio, calculate the risk premium per unit of risk (Sharpe ratio) that you expect to receive. Assume that the risk-free rate is 3.0%. (b) Using answers from a, which of these five portfolios is most likely to be the market portfolio and explain why. (c) If you are only willing to make an investment with a standard deviation of 7.0%, is it possible for you to earn a return of 7.0%? (d) What is the minimum level of risk that would be necessary for an investment to earn 7.0%? What is the composition of the portfolio along the Capital Market Line (CML) that will generate that expected return?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

John Davidson is an investment adviser at Leeds Asset Management plc. He is asked by a client to evaluate various investment opportunities currently available and he has calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets: Portfolio Expected return Standard deviation Q 7.8% 10.5% R 10.0% 14.0% S 4.6% 5.0% T 11.7% 18.5% U 6.2% 7.5% (a) For each portfolio, calculate the risk premium per unit of risk (Sharpe ratio) that you expect to receive. Assume that the risk-free rate is 3.0%. (b) Using answers from a, which of these five portfolios is most likely to be the market portfolio and explain why. (200 words maximum)
John Davidson is an investment adviser at Leeds Asset Management plc. He is asked by a client to evaluate various investment opportunities currently available and he has calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets: Portfolio Expected return Standard deviation Q 7.8% 10.5% R 10.0% 14.0% S 4.6% 5.0% T 11.7% 18.5% U 6.2% 7.5% (a) For each portfolio, calculate the risk premium per unit of risk (Sharpe ratio) that you expect to receive. Assume that the risk-free rate is 3.0%.
As 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 Bond 93% 75 32 13 Portfolio 1 2 3 4 Stock 7% 25 GB 87 a. 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. 1 2 3 Portfolio Ms. A ER 8% 9 10 11 b. Which portfolio represents the optimal strategic allocation for Ms. A? Which portfolio is optimal for Mr. B? Portfollo-Select-represents the optimal strategic allocation for Ms. A. Portfolio Select is the optimal allocation for Mr. B. c. For Ms. A, what level of risk tolerance would leave her indifferent between having Portfolio 1 or Portfolio 2 as her strategic…
Jack Ma is attempting to evaluate two possible portfolios – both consisting of the same five assets but held in different proportions. He is particularly interested in using beta to compare the risk of the portfolios and in this regard has gathered the following data. assets assets beta Portfolio A Portfolio B 1 1.30 10% 30% 2 0.70 30% 10% 3 1.25 10% 20% 4 1.10 10% 20% 5 0.90 40% 20% a) Calculate the betas for portfolio A and B. b) Compare the risk of each portfolio to the market as well as to each other C) Which portfolio is more risky and why?
Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospective investments: X, Y, and Z. Assume that the measure of risk Sharon cares about is an asset's standard deviation. The expected returns and standard deviations of the investments are as follows: Investment Expected return Standard deviation X 17% 7% Y 17% 8% Z 17% 9% a. If Sharon were risk neutral, which investment would she select? Explain why. b. If she were risk averse, which investment would she select? Why? c. If she were risk seeking, which investments would she select? Why? d. Suppose a fourth investment, W, is available. It offers an expected return of 18%,and it has a standard deviation of 9%. If Sharon is risk averse, can you say which investment she will choose? Why or why not? Are there any investments that you are certain she will not choose?
Karen Kay, a portfolio manager at Collins Asset Management, is using thecapital asset pricing model (CAPM) for making recommendations to her clients.Her research department has developed the information shown in the followingexhibit.Forecast Returns, Standard Deviations, and BetasForecast Return Standard Deviation BetaLow β stock (X) 14.0% 36% 0.8High β stock (Y) 17.0% 25% 1.5Market index 14.0% 15% 1.0Risk-free rate 5.0%(a) Calculate expected return and alpha for each stock.(b) Identify and justify which stock would be more appropriate for an investorwho wants to add this stock to a well-diversified equity portfolio.(c) Now consider Karen employs the “Betting Against Beta” strategy and let, , and denote the portfolio weights of the investmentin each of the asset classes (e.g. risk-free asset, low beta stock, market index,high beta stock, respectively) such that .According to its investment mandate, Collins Asset Management shouldtarget a gross leverage of 2.3. How much does she have to…
You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets. PORTFOLIO EXPECTED RETURN STANDARD DEVIATION Q 7.8% 10.5% R 10.0% 14.0% S 4.6% 5.0% T 11.7% 18.5% U 6.2% 7.5% a) For each portfolio, calculate the risk premium per unit of risk that you expect to receive [(E(R) –RFR)/ơ]. Assume that the risk free rate is 3.0%. b) Using…
You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets:Portfolio Expected Return Standard DeviationQ 7.8% 10.5%R 10.0 14.0S 4.6 5.0T 11.7 18.5U 6.2 7.5a. For each portfolio, calculate the risk premium per unit of risk that you expect to receive ([E(R) − RFR]/σ). Assume that the risk-free rate is 3.0 percent.b. Using your computations in Part a, explain which of these five portfolios is most likely tobe the market portfolio. Use your calculations to draw the capital market line (CML).c. If you are only willing to make an investment with σ = 7.0%, is it possible for you toearn a return of 7.0 percent?d. What is the minimum level of risk that would be necessary for an investment to earn7.0 percent? What is the composition of the portfolio along the CML that will generatethat expected return?e. Suppose you are now willing to make an investment…
You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviation for five different well-diversified portfolios of risky assets. Portfolio Expected return (%) Standard deviation (%) 7.8 10.5 R 10 14 S 4.6 11.7 18.5 6.2 7,5 a. For each portfolio, determine the Sharpe ratio. Assume that the risk free rate is 3%. b. Using your analysis in part (a), explain which of these five portfolios is most likely to be the market portfolio. Draw up the Capital Market Line Equation. c. If you are willing to make an investment with a standard deviation of 7%, is it possible for you to earn 7%? d. What is the minimum risk level that would be necessary for an investment to earn 7%. What is the composition of the portfolio along the CML that will generate the 7% return. e. Suppose you are now willing to make an investment with a standard deviation of 18.2%. Determine what would be the investment proportions in the risk free asset and…
Rose Berry is attempting to evaluate two possible portfolios, which consist of the same five assets held in different proportions. She is particularly interested in using beta to compare the risks of the portfolios, so she has gathered the data shown in the following table: Portfolio weights Asset Asset beta Portfolio A Portfolio B 1 1.43 15% 20% 2 0.69 40% 5% 3 1.15 10% 35% 4 1.42 5% 20% 5 0.97 30% 20% Totals 100% 100% a. Calculate the betas for portfolios A and B. b. Compare the risks of these portfolios to the market as well as to each other. Which portfolio is more risky?
You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviation for five different well-diversified portfolios of risky assets. Portfolio Expected return (%) Standard deviation (%) Q 7.8 10.5 R 10 14 S 4.6 5 11.7 18.5 6.2 7.5 a. For each portfolio, determine the Sharpe ratio. Assume that the risk free rate is 3%. b. Using your analysis in part (a), explain which of these five portfolios is most likely to be the market portfolio. Draw up the Capital Market Line Equation. c. If you are willing to make an investment with a standard deviation of 7%, is it possible for you to earn 7%? d. What is the minimum risk level that would be necessary for an investment to earn 7%. What is the composition of the portfolio along the CML that will generate the 7% return. e. Suppose you are now willing t f. Devise how would you apply portfolio performance evaluation and attribution analysis in practice. Illustrate with suitable…
Portfolio manager wants to optimize the riskiness of the two assets portfolio with the given statistics below:- Assets Return Volatility Weight A 17.00% 15.00% 40.00% B 21.00% 25.00% 60.00% Correlation -0.70 -0.35 0.25 0.50 0.70 Requirements Calculate the two assets portfolio standard deviation at different correlation levels which are mentioned above and suggest at which correlation is best suits to your portfolio.