Security A B C Beta 0.8 1.0 1.2 Expected Return 10% 12% 14% Residual standard deviation 25% 10% 20% If the standard deviation on the market is 20% calculate the variance of returns For C. A) 881 B) 400 C) 976 D) 576

E (R) 15.5% 5% 1.5 SML B (a) What is the Expected Return for a security with a Beta of 1.2?

% Return on T-Bills, Stocks and Market Index   States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean   7 16.9 20.7 19.6 15 Variance (%) ^2   0 549.09 244.124 358.04 313.6 Standard Deviation   0 23.4326695 15.6244712 18.92194493 17.7087549 Coefficient of Variation   0 1.386548491 7.54805372 0.965405354 1.18058366 Covariance wit MP   0 .0413 -.0275 .0231 .0314 Correlation with Market Index   0 0.9953 -0.9953 0.6894 1.0000 Beta   0 1.32 - 0.88 0.74 1.00 CAPM Req. Return   7.00 % 17.54 % -0.02% 12.89% 15.00% Valuation                ( Overvalued / Undervalued/Fairly Valued)   Valued Fairly…

Problem 5 Assume that you manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate (risk-free rate) is 7%. Your client chooses to invest 70% in the risky portfolio in your fund and 30% in a T-bill money market fund. We assume that investors use mean-variance utility: U = E(r) – 0.5 x Aa?, where E(r) is the expected return, A is the risk aversion coefficient and o? is the variance of returns. a) What is the expected value and standard deviation of the rate of return on your client's portfolio? b) What is the reward-to-volatility ratio (Sharpe ratio) of your risky portfolio? What is the reward-to-volatility ratio (Sharpe ratio) of your client's risky portfolio? Comment on the relationship between these two Sharpe ratio calculated and explain the intuition behind. c) Draw the Capital Allocation Line (CAL) of your portfolio on an expected return- standard deviation diagram. What is the slope of the CAL? Show the position of your…

Consider the following portfolio of assets: Loan Weight 1 0.30 2 0.70 Expected returni ம σ2 13% 11% 9.06% 82.0% P12=-0.87 8.72% 76.0% 012-75.0% What is the variance of the portfolio (round to two decimals)? Note: a^2 denotes the square of a. For example, 2^2 = 4, 3^2=9 (0.3)^2*(82.0%) + (0.7)^2*(76.0%) + (0.3) (0.7)(-0.87) (9.06%) (8.72%) = 30.19 (0.3)^2 (82.0%) + (0.7)^2*(76.0%) + 2(0.3) (0.7)(-0.87) (9.06 %) (8.72%) = 15.75 (0.3)^2*(82.0%) + (0.7)^2*(76.0%) + [(0.3) (0.7)]^2 (-0.87) (9.06%) (8.72%) = 41.59 (0.3) (82.0%) + (0.7) (76.0%) + 2(0.3) (0.7)(-0.87) (9.06 %) (8.72%) = 48.93

Calculate the beta of security E with the S&P. B, % -3.76 21.67 19.84 13.37 4.98 11.35 Year 1 2 3 4 5 6 O 1.20 O 0.40 O 0.36 O 0.24 A, % 10.67 12.54 -8.82 5.56 27.34 21.94 C, % 12.98 45.23 16.52 14.28 -15.53 1.28 D, % 25.51 18.97 -11.57 21.42 26.22 17.23 E, % 8.96 29.67 -12.07 25.68 31.08 -12.87 S&P, % 0.34 15.94 4.66 -4.45 15.14 -2.89

Exercice 5 ( Answer question 7 to  9) The expected return on treasury bills E(RF)= 4% Calculate the expected return E(.) for the market portfolio, the FGL security and the SDL Calculate the variance and standard deviation for the market portfolio, FGL security and SDL Calculate the covariance between the market portfolio and the FGL security, and the covariance between the market portfolio and the SDL Calculate the correlation coefficient between the market portfolio and the FGL security, and the correlation coefficient between the market portfolio and the SDL security. Calculate the beta of FGL stock relative to the market portfolio with two different methods. Calculate the beta of the SDL stock relative to the market portfolio with two different Calculate the expected return of the Pfl portfolio composed of 70% FGL stock and 30% SDL stock, what is the beta of this portfolio? Using CAPM assess the performance of FGL and SDL securities, Are they overvalued or undervalued? Which of…