Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Chapter 18.6, Problem 2EQ
What would happen to the contribution of security selection to overall performance if the actual
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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 does it show? Identify undervalued/overvalued investments from the graph
Excel Questions
1) What would happen to the contribution of asset allocation to overall performance if the actual weights had been 75/12/13 instead of 70/7/23? Explain your result.
2) What would happen to the contribution of security selection to overall performance if the actual return on the equity portfolio had been 8.28% instead of 7.28% and the return on the bond portfolio had been .89% instead of 1.89%? Explain your result.
Which of the following statements regarding the graph of the SML is most accurate?
A Select one
OA. The beta of Portfolios A, B, and C are identical as they fall directly on the line.
B. The expected return of Portfolio C is the difference between the market's expected return and the risk-free rate.
C. Portfolio A has lower systematic risk than Portfolio B.
D. The slope of the line is the market risk premium.
Chapter 18 Solutions
Essentials Of Investments
Ch. 18.1 - Prob. 1EQCh. 18.1 - Which fund would you choose if you were...Ch. 18.6 - Prob. 1EQCh. 18.6 - What would happen to the contribution of security...Ch. 18 - Prob. 1PSCh. 18 - Is it possible for a positive alpha to be...Ch. 18 - Prob. 3PSCh. 18 - Prob. 5PSCh. 18 - 6. stock price and dividend history are as...Ch. 18 - Prob. 7PS
Ch. 18 - Based on current dividend yields and expected...Ch. 18 - Consider the two (excess return) index~m0del...Ch. 18 - Prob. 10PSCh. 18 - Prob. 11PSCh. 18 - Prob. 12PSCh. 18 - Conventional wisdom says that one should measure a...Ch. 18 - Prob. 14PSCh. 18 - Prob. 15PSCh. 18 - Bill Smith is evaluating the performance of four...Ch. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 19PSCh. 18 - Prob. 20PSCh. 18 - Prob. 21PSCh. 18 - Prob. 22PSCh. 18 - Prob. 1CPCh. 18 - Prob. 2CPCh. 18 - Prob. 3CPCh. 18 - Prob. 4CPCh. 18 - What is the Sharpe performance measure for...Ch. 18 - Prob. 6CPCh. 18 - Prob. 7CPCh. 18 - Prob. 8CPCh. 18 - Prob. 9CPCh. 18 - Prob. 10CPCh. 18 - Prob. 11CPCh. 18 - Prob. 12CPCh. 18 - Prob. 13CPCh. 18 - Prob. 14CPCh. 18 - Prob. 1WMCh. 18 - Prob. 2WMCh. 18 - Prob. 3WMCh. 18 - Prob. 4WMCh. 18 - Prob. 5WMCh. 18 - Prob. 7WM
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.arrow_forwardIt is a risk adjusted performance measure that represents the average return on a portfolio. a. sharpe ratio b. Treynor indexarrow_forwardExcel Questions 1) What would happen to the contribution of asset allocation to overall performance if the actual weights had been 75/12/13 instead of 70/7/23? Explain your result. 2) What would happen to the contribution of security selection to overall performance if the actual return on the equity portfolio had been 8.28% instead of 7.28% and the return on the bond portfolio had been .89% instead of 1.89%? Explain your result. Below is the Table of Actual Weights at 70/7/23 Performance Attribution Bogey Bogey Portfolio Benchmark Return on Portfolio Component Index Weight Index Return Equity S&P 500 0.6 5.81% 3.4860% Bonds Aggregate Index 0.3 1.45% 0.4350% Cash Money Market 0.1 0.48% 0.0480% Return on Bogey 3.9690% Actual Managed Managed Portfolio Portfolio Actual Portfolio Component Weight Return Return Equity 0.70 7.28% 5.0960% Bonds 0.07 1.89% 0.1323%…arrow_forward
- 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.arrow_forwardWhich of the following measures reflects the excess return earned on a portfolio per unit of its systematic risk a. Treynor’s measure b. Sharpe’s measure c. Jensen’s measure d. Total measurearrow_forwardThe slope of the security market line is the: Multiple Choice risk-free interest rate. reward-to-risk ratio. portfolio weight. beta coefficient.arrow_forward
- d. Interpret your results in (c) above, assuming that the historical average return of 8.5% from the stock is a good benchmark. e. Critically evaluate the strengths and weaknesses of applying the implied rate of return from the RIVM as a proxy of the expected return.arrow_forwardPlot 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 (arrow_forwardWhich of the following statements regarding unsystematic risk is accurate? Multiple Choice It is measured by beta. It is compensated for by the risk premium. It can be effectively eliminated by portfolio diversification. It is measured by standard deviation. It is related to the overall economy.arrow_forward
- The security market line depicts: a. Expected return as a function of systematic risk (indicated by beta) b. The market portfolio as the optimal portfolio of risky assets c. The relationship between a security’s return and the return on the index d. Portfolio combinations of the market portfolio and the risk-free asset e. Expected return as a function of volatilityarrow_forwardExercises: 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%arrow_forwardWhich of the following statements regarding the graph of the SML is most accurate? Select one O A. O B. B-1.0 The beta of Portfolios A, B, and C are identical as they fall directly on the line. The expected return of Portfolio C is the difference between the market's expected return and the risk-free rate. O C. Portfolio A has lower systematic risk than Portfolio B. OD. The slope of the line is the market risk premium.arrow_forward
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