Adequate information: Standard deviation (σ) for both markets = 10% Expected return on every security in both markets = 10% Beta factor in the first market (ß 1 ) = 1.5 Beta factor in the second market (ß 2 ) = 0.5 The return for each security, i, in the first market = R 1 i = 0.10 + 1.5 F+ ε 1 i The return for each security, j, in the second market = R 2 j = 0.10 + 0.5 F+ ε 2 i To compute: The market that would be preferred by risk-averse to invest. Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

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Answer 1

Question

Chapter 12, Problem 8QAP

a.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

b.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

c.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

d.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The relationship between the correlation where the risk-averse person is indifferent.

Introduction: A risk-averse person is indifferent between the two markets when the risk of both markets is equal.

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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 ?%

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.)

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.

Answer 2

Question

Chapter 12, Problem 8QAP

a.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

b.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

c.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

d.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The relationship between the correlation where the risk-averse person is indifferent.

Introduction: A risk-averse person is indifferent between the two markets when the risk of both markets is equal.

Expert Solution & Answer

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See solution

Answer 3

Question

Chapter 12, Problem 8QAP

a.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

b.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

c.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

d.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The relationship between the correlation where the risk-averse person is indifferent.

Introduction: A risk-averse person is indifferent between the two markets when the risk of both markets is equal.

Expert Solution & Answer

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See solution

Answer 4

Question

Chapter 12, Problem 8QAP

a.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

b.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

c.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

d.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The relationship between the correlation where the risk-averse person is indifferent.

Introduction: A risk-averse person is indifferent between the two markets when the risk of both markets is equal.

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 5

Chapter 12, Problem 8QAP

a.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

b.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

c.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

d.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The relationship between the correlation where the risk-averse person is indifferent.

Introduction: A risk-averse person is indifferent between the two markets when the risk of both markets is equal.

Answer 6

Chapter 12, Problem 8QAP

a.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

Answer 7

Chapter 12, Problem 8QAP

a.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

Answer 8

b.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

Answer 9

b.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

Answer 10

c.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

Answer 11

c.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The market that would be preferred by risk-averse to invest.

Introduction: Portfolio variance refers to the measurement of the dispersion of returns. Standard deviation refers to the measurement of deviation of actual returns from average returns.

Answer 12

d.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The relationship between the correlation where the risk-averse person is indifferent.

Introduction: A risk-averse person is indifferent between the two markets when the risk of both markets is equal.

Answer 13

d.

Summary Introduction

Adequate information:

Standard deviation (σ) for both markets = 10%

Expected return on every security in both markets = 10%

Beta factor in the first market (ß₁) = 1.5

Beta factor in the second market (ß₂) = 0.5

The return for each security, i, in the first market = R1i=0.10+1.5F+ε1i

The return for each security, j, in the second market = R2j=0.10+0.5F+ε2i

To compute: The relationship between the correlation where the risk-averse person is indifferent.

Introduction: A risk-averse person is indifferent between the two markets when the risk of both markets is equal.

Answer 14

Expert Solution & Answer

Answer 15

Expert Solution & Answer

Answer 16

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Answer 17

Ch. 12 - Prob. 1CQ Ch. 12 - Prob. 2CQ Ch. 12 - Prob. 3CQ Ch. 12 - Prob. 4CQ Ch. 12 - Market Model versus APT What are the differences...Ch. 12 - APT In contrast to the CAPM, the APT does not...Ch. 12 - CAPM versus APT What is the relationship between...Ch. 12 - Prob. 8CQ Ch. 12 - Data Mining What is data mining? Why might it...Ch. 12 - Prob. 10CQ

Solution Summary: The author explains that portfolio variance refers to the measurement of the dispersion of returns and standard deviation.

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Chapter 12 Solutions