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.PortfolioExpected return (%)Standard deviation (%)7.810.5R1014S4.611.718.56.27,5a. 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 market portfolio? Determine the expected return for this portfolio.f. Devise how would you apply portfolio performance evaluation and attribution analysis in practice. Illustrate with suitable example.

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Answered: You are evaluating various investment…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 1Q

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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 (%) 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…
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…
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.
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?
Suppose you are considering investing your entire portfolio in three assets A, B and C. You expect that after you invest, four possible mutually exclusive scenarios will occur, with associated returns (in %) for each of the three assets as listed below. The probability of each scenario is given below (Attached image). Find the expected returns and standard deviations of Asset A, B & C. (HINT: the expected return is given by the probability-weighted sum of returns in each scenario. The expected standard deviation is given by the square root of the probability-weighted sum of squared deviations from the expected return.) Is there any reason to invest in Asset A given its low expected return and high standard deviation?
f. Assume a Portfolio of two assets A and B whose standard deviations of their returns are 8.6% and 10.8% respectively, while their correlation coefficient of returns is Pas = - 0.61. You are given the right to do portfolio optimization without restrictions. What proportions would you choose and why?
Jason Jackson is attempting to evaluate two possible portfolios 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: LOADING... . a. Calculate the betas for portfolios A and B. b. Compare the risk of each portfolio to the market as well as to each other. Which portfolio is more risky? Question content area bottom Part 1 Data table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Portfolio Weights Asset Asset Beta Portfolio A Portfolio B 1 1.35 17% 29% 2 0.69 26% 8% 3 1.24 10% 22% 4 1.06 11% 20% 5 0.87 36% 21% Total 100% 100% a. The beta of portfolio A is enter your response here. (Round to three…
Consider two assets. Suppose that the return on asset 1 has expected value 0.05 and standard deviation 0.1 and suppose that the return on asset 2 has expected value 0.02 and standard deviation 0.05. Suppose that the asset returns have correlation 0.4.Consider a portfolio placing weight w on asset 1 and weight 1-w on asset 2; let Rp denote the return on the portfolio. Find the mean and variance of Rp as a function of w.
Consider the expected return and standard deviation of the following two assets: Asset 1: E[r1]=0.1 and σ1=0.2 Asset 2: E[r2]=0.3 and σ2=0.4 (a) Draw (e.g. with Excel) the set of achievable portfolios in mean-standard deviation space for the cases: (i) ρ12= -1, (ii) ρ12=0. (b) Suppose ρ12=-1. Which portfolio has the minimal variance? What is the variance and expected return of that portfolio? (c) Derive the formula for the variance of a portfolio with four assets.
Consider the following performance data for a portfolio manager: Benchmark Portfolio Index Portfolio Weight Weight Return Return Stocks 0.65 0.7 0.11 0.12 Bonds 0.3 0.25 0.07 0.08 Cash 0.05 0.05 0.03 0.025 a.Calculate the percentage return that can be attributed to the asset allocation decision. b.Calculate the percentage return that can be attributed to the security selection decision.
Assume a Portfolio of two assets A and B whose standard deviations of their returns are 8.6% and 10.8% respectively, while their correlation coefficient of returns is Pas= - 0.61. You are given the right to do portfolio optimization without restrictions. What proportions would you choose and why?

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