You are an investment analyst at an asset management firm. Your colleague, the in-house economist, has analyzed all the risky securities in your economy - A, B and C. He provides you with the following statistics: Securities Expected Returns Standard Deviation 0.35 0.25 0.18 A B C 0.15 0.10 0.075 0.03 Risk-Free The Correlation between A and B is 0.2, between B and C is 0.5, and between A and C is 0.3. The prevailing risk-free rate is 3%. What is the Sharpe ratio of the market portfolio in this economy?
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- You are an investment analyst at an asset management firm. Your colleague, the in-house economist, has analyzed all the risky securities in your economy - A, B and C. He provides you with the following statistics: A B C Risk-Free Securities Expected Returns Standard Deviation 0.25 0.20 0.12 0.12 0.11 0.08 0.01 The Correlation between A and B is 0.25, between B and C is 0.75, and between A and C is 0.5. What is the slope of the capital market line in this economy? Group of answer choices 0.27 0.58 0.62 0.66 052(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 Probability 0.15 0.35 0.35 0.15 (Click on the icon in order to copy its contents into a spreadsheet.) ew an example Get more help. T 3 a. Given the information in the table, the expected rate of retum for stock A is 15.6 %. (Round to two decimal places.) The standard deviation of stock A is %. (Round to two decimal places.) E D 80 73 Return. 12% 16% 18% U с $ 4 R F 288 F4 V Common Stock B % 5 T FS G 6 Return -7% 7% 13% 21% B MacBook Air 2 F& Y H & 7 N 44 F? U J ** 8 M | MOSISO ( 9 K DD O . Clear all : ; y 4 FIX { option [ + = ? 1 Check answer . FV2 } ◄ 1 delete 1 return shiftCourse: FinanceAs a great investor, you are interested in 3 assets to invest: A, B and C. A financial advisor tells you that the returns on the assets are independent of each other, and you are given the following data: Asset A B C E(Ri) 0.05 0.035 0.06 Variance 0.0015 0 0.008 You have not yet analyzed what your degree of risk aversion (A) is, but you know that your utility function behaves as follows: U[ E(Rp)] = E(Rp) - 0.5 * A * Variance. (See attached image for a better understanding) You are asked to:(a) Find the optimal portfolio with these 3 assets {called wA, wB and wC}.b) Calculate the expected return and risk of the optimal portfolio for the following degrees of risk aversion (A):(i) A = 5(ii) A = 10(iii) A = 16 Please ASAP
- You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset: a. Fill in the missing values in the table. (Leave no cells blank - be certain to enter 0 wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Security Expected Return Standard Deviation Correlation* Beta Firm A 0.120 0.21 0.96 Firm B 0.130 0.40 1.51 Firm C 0.111 0.76 0.25 YOU The market portfolio 0.12 0.21 ma The risk-free asset 0.05 a.You have been provided the following data on the securities of three firms, the market portfolio, and the risk-free asset: a. Fill in the missing values in the table. (Leave no cells blank - be certain to enter O wherever required. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Standard Deviation Security Expected Return Correlation Beta Firm A .118 .23 .94 Firm B .132 .42 1.49 Firm C .113 .74 .27 The market portfolio .12 20 The risk-free asset .es "With the market portfolio. b-1. According to the CAPM, what is the expected return of Firm A's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return b-2. What is your investment recommendation for someone with a well-diversified portfolio? Sell • Buy b-3. According to the CAPM, what is the expected return of Firm B's stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2…QUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6% whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using CAPM. 2) Compute the value of each investment based on your required rate of return and interpret the results comparing with the market values. 3) Which investment would you select? Explain why using appropriate financial jargon (language). 4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3? 5) AACSB Critical Thinking Questions: A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? (Textbook page: 198) B) What are the difficulties in using the PE ratio to value stock?…
- “In investing, risk and return are highly correlated. Increased potential returnson investment usually go hand-in-hand with increased risk”. Critically evaluatethe above statement.ii A Financial Analyst is analyzing two investment alternatives Y and Z. Theirrates of returns under different probabilities are as follows.Probability Rate of ReturnY Z0.2 22% 5%0.6 14% 15%0.2 -4% 25%a. For Y and Z, calculate expected return, variance and standard deviation.b. Calculate the coefficient of variation for both stocks.c. If you are an investor, which company you would select for theinvestment.a) Consider two assets with the following characteristics: Expected return of asset 1 = 0.15, Standard deviation of asset 1 = 0.10, portion in asset 1 = 0.5 Expected return of asset 2 = 0.20, Standard deviation of asset 2 = 0.20, Compute the expected return and standard deviation of portfolio if correlation coefficient (r1,2) = 0.40 and (r1,2)= -0.60 b) Why do most investors hold diversified portfolio?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…
- When working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph Please answer A, B, C & DExercises: a. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance between the returns of A and B is 0.006. The correlation of returns between A and B is: b. Explain the differences between systemic risk and unsystematic risk, give additional examples c. Compare and contrast the Capital Market Line and Security Market Line d. The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of the market's returns is 0.08, and the standard deviation of the stock's returns is 0. 11. What is the correlation coefficient of the returns of the stock and the returns of the market? e. According to the CAPM, what is the required rate of return for a stock with a beta of 0.7, when the risk-free rate is 7% and the expected market rate of return is 14%