Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Chapter 5, Problem 1CP
A portfolio of nondividend-paying stocks earned a geometric mean return of 5% between 1, January 1, 2010, and December 31, 2016. The arithmetic mean return for the same period was 6%. If the market value of the portfolio at the beginning of 2010 was $100, 000, what was the market value of the portfolio at the end of 2016? (LO 5-1)
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The following are the calendar year rates of return for a S&P 500 ETF (Ticker: IVV) between
2013 and 2017.
Year
IVV
2013
29.60%
2014
11.39%
2015
-0.73%
2016
9.54%
2017
19.42%
What is the geometric mean rate of return? Round to the nearest 0.01, in percentage terms.
Stocks A and B have the following historical returns:
Stock A's Returns
(24.25%)
18.50
38.67
14.33
39.13
Year
2015
2016
2017
2018
2019
Assume the risk-free rate during this time was 3.5%. What are the Sharpe ratios for
Stocks A and B and the portfolio over this time period using their average returns?
Answers:
a) Sharpe ratio for Stock A
b) Sharpe ratio for Stock B
0.5332
0.8839
c) Sharpe ratio for Portfolio AB
Stock B's Returns
5.50%
26.73
48.25
(4.50)
43.86
Note: enter your answers with 4 decimal places
Using the data in the table, consider a portfolio that maintains a 35% weight on stock A and a 65% weight on stock B.
a. What is the return each year of this portfolio? (2010-2015)
b. Based on your results from part (a), compute the average return and volatility of the portfolio.
c. Show that (i) the average return of the portfolio is equal to the (weighted) average of the average returns of the two stocks, and (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.9.
d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks.
Chapter 5 Solutions
Essentials Of Investments
Ch. 5 - Prob. 1PSCh. 5 - The real interest rate approximately equals the...Ch. 5 - When estimating a Sharpe ratio, would it make...Ch. 5 - You’ve just decided upon your capital allocation...Ch. 5 - Prob. 5PSCh. 5 - The stock of Business Adventures sells for $40 a...Ch. 5 - Prob. 7PSCh. 5 - a. Suppose you forecast that the standard...Ch. 5 - Using the historical risk premiums as your guide,...Ch. 5 - What has been the historical average real rate of...
Ch. 5 - Consider a risky portfolio. The end-of-year cash...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - For Problems 12-16, assume that you manage a risky...Ch. 5 - Prob. 17PSCh. 5 - You manage an equity fund with an expected risk...Ch. 5 - What is the reward-to--volatility (Sharpe) ratio...Ch. 5 - A portfolio of nondividend-paying stocks earned a...Ch. 5 - Which of the following statements about the...Ch. 5 - Which of the following statements reflects the...Ch. 5 - Use the following data in answering CFA Questions...Ch. 5 - Prob. 5CPCh. 5 - Lise the following data in answerifng CFA Question...Ch. 5 - Use the following scenario analysis for stocks X...Ch. 5 - Prob. 8CPCh. 5 - Use the following scenario analysis for stocks X...Ch. 5 - 10. Probabilities for three states of the economy...Ch. 5 - 11. An analyst estimates that a stock has the...Ch. 5 - Prob. 1WMCh. 5 - Prob. 2WMCh. 5 - Prob. 3WM
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- Assume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (%) T-Bill Return (%) 2013 36.00 0.22 2014 15.40 0.22 2015 −5.20 0.22 2016 17.00 0.09 2017 26.00 0.11 Required: a. What was the risk premium on common stock in each year? b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)arrow_forwardAssume these are the stock market and Treasury bill returns for a 5-year period: Stock Market T-Bill Return (%) 0.02 0.02 0.02 0. 20 Return (%) Year 2013 2014 2015 2016 2017 31.7 10.9 -1.6 13.0 21.3 0.80 Required: a. What was the risk premium on common stock in each year? (Negative values should be entered with a negative sign.) b. What was the average risk premium? c. What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)arrow_forwardAssume these are the stock market and Treasury bill returns for a 5-year period: Year Stock Market Return (%) T-Bill Return (%) 2016 13.0 0.2 2017 21.0 0.8 2018 -6.2 1.8 2019 29.8 2.1 2020 20.6 0.4 Required: What was the risk premium on common stock in each year? What was the average risk premium? What was the standard deviation of the risk premium? (Ignore that the estimation is from a sample of data.)-- expressed in % (NOTE: 11.31% is incorrect)arrow_forward
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