The following are estimates for two stocks. Firm- Specific Expected Standard Stock Return Beta Deviation AB 14% 0.90 30% 21 1.40 42 The market index has a standard deviation of 20% and the risk-free rate is 7%. Required: a. What are the standard deviations of stocks A and B? b. Suppose that we were to construct a portfolio with proportions: Stock A Stock B 0.30 0.45 0.25 T-bills Compute the expected return, beta, nonsystematic standard deviation, and standard devia

The following are estimates for two stocks. Firm- Specific Expected Standard Stock Return Beta Deviation AB 14% 0.90 30% 21 1.40 42 The market index has a standard deviation of 20% and the risk-free rate is 7%. Required: a. What are the standard deviations of stocks A and B? b. Suppose that we were to construct a portfolio with proportions: Stock A Stock B 0.30 0.45 0.25 T-bills Compute the expected return, beta, nonsystematic standard deviation, and standard devia

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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3. Consider three stocks A, B and C and a market index M with the following prices: Year TO T1 T2 T3 A 85 108 110 125 B 12 14 13 15 C 50 60 70 75 M 1128 1435 1578 1786 The risk-free rate equals 4%. a. Compute the expected return and risk on each stock and the market index. b. Construct the matrix of variances and covariances between these assets. c. Construct the matrix of the correlation coefficients. d. Compute the beta coefficients of these companies and the expected return at equilibrium. e. Construct the minimum risk portfolio P1 composed of A and C. Compute the expected return and risk on this portfolio. f. Construct a portfolio P2 composed of A, B and C in proportions of 20%, 30% and 50%. Compute the expected return and risk on this portfolio. What is the contribution of each security to the return and risk pf this portfolio? g. Construct an equally weighted portfolio P3 composed of A, B, C and the risk-free rate. Compute the beta coefficient and position this portfolio with…
The index model has been estimated for stock A with the following results: RA = 0.01 + 1.2RM + eA. σM = 0.15; σ(eA) = 0.10. The standard deviation of the return for stock A is
K (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.20 0.60 0.20 Common Stock B Return 13% 17% 18% Probability 0.10 0.40 0.40 0.10 (Click on the icon in order to copy its contents into a spreadsheet.) Return -7% 5% 16% 21% www a. Given the information in the table, the expected rate of return for stock A is 16.40 %. (Round to two decimal places.) The standard deviation of stock A is 1.74 %. (Round to two decimal places.) b. The expected rate of return for stock B is 9.8 %. (Round to two decimal places.) The standard deviation for stock B is 6.12 %. (Round to two decimal places.)
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA - 2.60 + 0.90RM + CA Rg- -2.00 + 1.20RM + eg OM- 26, R-equarea 0.21; R-squaren 0.12 Assume you create portfolio Pwith investment proportions of 0.70 in A and 0.30 in B. a. What is the standard deviation of the portfollo? (Do not round your intermediate calculations. Round your answer to 2 decimal places.) Standard deviation b. What is the beta of your portfolio? (Do not round your intermediate calculations. Round your answer to 2 decimal places.) Portfolio beta c. What is the firm-specific variance of your portfolio? (Do not round your intermediate calculations. Round your answer to 4 decimal places.) Firm-specific
The following are estimates for two stocks. Stock Expected Return Beta Firm-Specific Standard Deviation A 12 0.85 32% B 18 1.40 48% The market index has a standard deviation of 22% and the risk-free rate is 11%. a. What are the standard deviations of stocks A and B? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Suppose that we were to construct a portfolio with proportions: Stock A 0.35 Stock B 0.40 T-bills 0.25 Compute the expected return, standard deviation, beta, and nonsystematic standard deviation of the portfolio. (Do not round intermediate calculations. Enter your answer for Beta as a number, not a percent. Round your answers to 2 decimal places.)
The following are estimates for two stocks. Expected Return Stock A B 0.16 0.19 Beta 0.84 1.23 firm-specific Standard Deviation 0.27 0.38 The market index has a standard deviation of 0.21 and the risk-free rate is 0.03. Suppose that we were to construct a portfolio with proportions: Stock A 0.34 Stock B 0.44 The remaining proportion is invested in Tbills Compute the standard deviation of the portfolio. Round your answer to 4 decimal places. For example if your answer is 3.205%, then please write down 0.0321.
The index model for stock A has been estimated with the following result: RA = 0.01 + 0.9RM + eA. If σM = 0.25 and R2A = 0.25, the standard deviation of return of stock A is:
The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why? E(R) E(R) E(R) В В A A А (A) (B) (C)
Consider an investment portfolio that consists of three different stocks, with the amount invested in each asset shownbelow. Assume the risk-free rate is 2.5% and the market risk premium is 6%. Use this information to answer thefollowing questions.Stock Weights BetasChesapeake Energy 25% 0.8Sodastream 50% 1.3Pentair 25% 1.0a) Compute the expected return for each stock using the CAPM and assuming that the stocks are all fairly priced.b) Compute the portfolio beta and the expected return on the portfolio.c) Now assume that the portfolio only includes 50% invested in Pentair and 50% invested in Sodastream (i.e., a twoassetportfolio). The yearly-return standard deviation of Pentair is 48% and the yearly-return standard deviation ofSodastream is 60%. The correlation coefficent between Pentair’s returns and Sodastream’s returns is 0.3 What is theexpected yearly-return standard deviation for this portfolio?
Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .092, E(RB) = 152, đA = .362, and Og = .622. %3D Calculate the expected return of a portfolio that is composed of 37 percent A and 63 percent B when the correlation between the returns on A and B is .52. (Do not a-1. round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the standard deviation of a portfolio that is composed of 37 percent A and 63 percent B when the correlation coefficient between the returns on A and B is .52. а-2. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Calculate the standard deviation of a portfolio with the same portfolio weights as in h part (a) when the correlation coefficient between the returns on A and B is -.52. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a-1.…
Suppose that three stocks (A, B, and C} and two common risk factors (1 and 2) have the following relationship: E(RA) = (1.1)A1 + (0.8)A2 E(RB) = (0.7)A1 + (0.6)A2 E(RC) = (0.3)A1 + (0.4)A2 a. If A1 = 4 percent and A2 = 2 percent, what are the prices expected next year for each of the stocks? Assume that all three stocks currently sell for $30 and will not pay a dividend in the next year. b. Suppose that you know that next year the prices for Stocks A, B, and C will actually be $31.50, $35.00, and $30.50. Create and demonstrate a riskless, arbitrage investment to take advantage of these mispriced securities. What is the profit from your investment? You may assume that you can use the proceeds from any necessary short sale. Problems 13 and 14 refer to the data contained in Exhibit 7.23, which lists 30 monthly excess returns to two different actively managed stock portfolios (A and B) and three different common risk factors (1, 2, and 3). {Note: You may find it…
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 0.03 + 0.7 RM + eA RB = -0.02+ 1.2 RM + eB σM =0.20; R-square A = 0.25 R-square B = 0.20 What is the standard deviation of A & B, respectively? Group of answer choices 0.54, 0.28 0.28, 0.54 0.45, 0.50 0.50, 0.45

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