You can invest in the risk-free security (T-Bill) and only one of the following three risky securities: Security A: E(RA) = 10; STD DEV(A) = .10 Security B: E(RB) = .15; STD DEV(B) = .15 Security C: E(RC) = 12; STD DEV(C) = .11 If the risk-free rate is .05 (5%), which security should you pick? Multiple Choice Need more information to answer this question. Security B Security C Either Security A or B. They are the same. Security A

You can invest in the risk-free security (T-Bill) and only one of the following three risky securities: Security A: E(RA) = 10; STD DEV(A) = .10 Security B: E(RB) = .15; STD DEV(B) = .15 Security C: E(RC) = 12; STD DEV(C) = .11 If the risk-free rate is .05 (5%), which security should you pick? Multiple Choice Need more information to answer this question. Security B Security C Either Security A or B. They are the same. Security A

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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Consider the following data for two risk factors (1 and 2) and two securities (J and L):λ0 = 0.07 λ1 = 0.04 λ2 = 0.06bJ1 = 0.10 bJ2 = 1.60 bL1 = 1.80 bL2 = 2.45a. Compute the expected returns for both securities. b. Suppose that Security J is currently priced at $50 while the price of Security L is $15.00.Further, it is expected that both securities will pay a dividend of $0.95 during the coming year.What is the expected price of each security one year from now? c. Compute the correlation between stock A and stock B considering the following data.Standard deviation of stock A = 10 percentStandard deviation of stock B = 17 percentCovariance between the two stocks = 90.
Assume that security returns are generated by the single-index model, Ri = αi + βiRM + ei where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 1.4 14 % 23 % B 1.6 16 14 C 1.8 18 17 a. If σM = 22%, calculate the variance of returns of securities A, B, and C. b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)
Assume that security returns are generated by the single-index model,Ri = αi + βiRM + eiwhere Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 0.7 7 % 20 % B 0.9 9 6 C 1.1 11 15 a. If σM = 16%, calculate the variance of returns of securities A, B, and C. b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)
The following below are the expected return and betas of the given set of securities. Given that the risk free rate is 7% and the market return is 13%. Security N O P Return 20 21 23 Beta 1.2 1.8 0.82 Calculate the market risk premium, and the expected return of each asset using CAPM.
5. You are considering investing in two securities, X and Y. The following data are available for the two securities: Security X Security Y Expected return 0.10 0.07 Standard deviation of returns 0.08 0.04 Beta 1.10 0.75
Assume that security returns are generated by the single-index model, Ri = alphai + BetaiRM + ei where Ri is the excess return for security i and RM is the market's excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data. Security Betai E(Ri) sigma(ei) A 1.4 15% 28% B 1.6 17% 14% C 1.8 19% 23% a. If simaM = 24%, calculate the variance of returns of securities A, B, and C (round to whole number). Variance Security A Security B Security C b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C (enter the variance answers as a whole number decimal and the mean as a whole number percentage)? Mean Variance Security A ?% Security B ?% Security C ?%
Consider two securities, A and B, whose standard deviations of returns and betas are given below: Security A Security B Standard deviation 15% 25% Beta 1.30 0.75 Which security will have the higher risk premium? Security A or B?
(a) Mr Adani invests in two risky securities with the following details: Security 1: r1=0.16; 01-0.30; Security 2: r2=0.08; 2=0.25 Where r1 is the expected return of security 1 and o1 is the standard deviation of returns of security 1; r2 is the expected return of security 2 and o2is the standard deviation of returns of security 2 The correlation coefficient (p12) between the returns of the two securities is -0.5 (i) Calculate the expected rate of return(r) and risk(o) for the following portfolios: 1.40% security 1 and 60% security 2 II.80% security 1 and 20% security 2 I (ii) Given a risk-free rate of 4%, describe how Mr. Adani can use a combination of a risk-free instrument and a risky portfolio with an expected return of 15% to achieve an expected return of 26%.
Assume that a security is fairly priced and has an expected rate of return of 0.13. The market expected rate of return is 0.13, and the risk-free rate is 0.04. The beta of the stock is A. 1.7. B. 0.95. C. 1. D. 1.25.
The market portfolio (M) has the expected rate of return E(rM) = 0.12. Security A is traded in the market. We know that E(rA) = 0.17 and βA = 1.5. (1) What is the rate of return of the risk-free asset (rf)? (2) Security B is also traded in the market. βB = 0.8. Then what is “fair” expected rate of return of security B according to the CAPM? (3) Security C is a third security traded in the market. βC = 0.6, and from the market price, investors calculate E(rC) = 0.1. Is C overpriced or underpriced? What is αC?
6) Consider two perfectly negatively correlated risky securities A and B. A has an expected rate of return of 10% and a standard deviation of 16%. B has an expected rate of return of 8% and a standard deviation of 12%. The risk-free portfolio that can be formed with the two securities will earn a(n) _____ rate of return. A) 8.5% B) 9.0% C) 8.9% D) 9.9% Justify the correct answer.
Consider the following information: Standard Deviation Beta Security C Security K Which security will have a higher expected return? Oa. C O b. K 20% 30% 1.25 0.95 A Oc Both securities will have the same expected return Od. Insufficient information to answer the question

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