Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
10th Edition
ISBN: 9780077835422
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
Question
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Chapter 7, Problem 29PS
Summary Introduction

(a)

To calculate:

The expected profit and standard deviation where ten stocks have an positive alpha of3%and ten have negative alpha of3%when 20 stocks data studied by analyst and beta of all the stock in the economy is1. Firms have a standard deviation of30%.

Introduction:

Expected return: It is the gain or loss to an investor which is expected on an investment and known as expected rate of return.

Standard deviation: It is historical volatility. It's applied to the annual rate of return to quantify the investment volatility.

Expert Solution
Check Mark

Answer to Problem 29PS

Expected profit is$60,000

Standard deviation of return is$1,34,164.08

Explanation of Solution

Given:

Beta of all stock is1

Alpha of10stock is3%

Alpha of10stock is3%

Investors invest$1million for buying and selling positive and negative alpha stock respectively.

  Expected return=Inva1+w×Rm-Inva2+w×Rm

Where:

a1is first 10 stock's positive alpha i.e.3%

a2is next 10 stock's negative alpha i.e.3%

w is weight measurement of each stock i.e.1

  Rmis Market return.

So expected return by using above formula

  Expected Return=$10,00,0000.03+1×Rm$10,00,0000.03+1×Rm=$10,00,0000.03+Rm$10,00,0000.03Rm=$10,00,0000.03+Rm+0.03Rm=$10,00,000×0.06=$60,000

Standard deviation for return as follows

  Standard Deviation=No. of stocksTotal invest10Std. deviation2=20$10,00,00010×0.302=20$30,0002=$18,00,00,00,000=$1,34,164.08

The risk exposure on positive and negative alpha will be eliminated but the variance is not zero. So the portfolio is not diversified.

Summary Introduction

(b)

To calculate:

The Expected profit and standard deviation where ten stocks have an positive alpha of3%and ten have negative alpha of3%when 50 stocks data studied by analyst. And beta of all the stock in the economy is1. Firms have a standard deviation is30%.

Introduction:

Expected return: It is the gain or loss to an investor which is expected on an investment and known as expected rate of return.

Standard deviation: It is historical volatility. It's applied to the annual rate of return to quantify the investment volatility.

Expert Solution
Check Mark

Answer to Problem 29PS

Expected profit is$60,000

Standard deviation of return is$84,852.81

Explanation of Solution

Given:

Beta of all stock is1

Alpha of25stock is3%

Alpha of25stock is3%

  Expected return=Inva1+w×Rm-Inva2+w×Rm

Where:

a1is first 10 stock's positive alpha i.e.3%

a2is next 10 stock's negative alpha i.e.3%

w is weight measurement of each stock i.e.1

  Rmis Market return.

So expected return by using above formula

  Expected Return=$10,00,0000.03+1×Rm$10,00,0000.03+1×Rm=$10,00,0000.03+Rm$10,00,0000.03Rm=$10,00,0000.03+Rm+0.03Rm=$10,00,000×0.06=$60,000

Standard deviation is calculated as under:

  Standard Deviation=No. of stocksTotal invest25Std. deviation2=50$10,00,00025×0.302=50$12,0002=$7,20,00,00,000=$84,852.81

Summary Introduction

(c)

To calculate:

The expected profit and standard deviation where ten stocks have an positive alpha of3%and ten have negative alpha of3%when 50 stocks data studied by analyst and beta of all the stock in the economy is1. Firms have a standard deviation is30%.

Introduction:

Expected return: It is the gain or loss to an investor which is expected on an investment and known as expected rate of return.

Standard deviation: It is historical volatility. It's applied to the annual rate of return to quantify the investment volatility.

Expert Solution
Check Mark

Answer to Problem 29PS

Expected profit is$60,000

Standard deviation of return is$60,000

Explanation of Solution

Given:

Beta of all stock is1

Alpha of50stock is3%

Alpha of50stock is3%

  Expected return=Inva1+w×Rm-Inva2+w×Rm

Where:

a1is first 10 stock's positive alpha i.e.3%

a2is next 10 stock's negative alpha i.e.3%

w is weight measurement of each stock i.e.1

  Rmis Market return.

So expected return by using above formula

  Expected Return=$10,00,0000.03+1×Rm$10,00,0000.03+1×Rm=$10,00,0000.03+Rm$10,00,0000.03Rm=$10,00,0000.03+Rm+0.03Rm=$10,00,000×0.06=$60,000

Standard deviation is calculated as under:

  Standard Deviation=No. of stocksTotal invest25Std. deviation2=100$10,00,00050×0.302=100$6,0002=$3,60,00,00,000=$60,000

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Chapter 7 Solutions

Essentials of Investments (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)

Ch. 7 - You arc a consultant to a large manufacturing...Ch. 7 - Consider the following table, which gives a...Ch. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 16PSCh. 7 - If the simple CAPM is valid, which of the...Ch. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Prob. 22PSCh. 7 - In problem 2123 below, assume the risk-free rate...Ch. 7 - Two investment advisers are comparing performance....Ch. 7 - Suppose the yield on short-term government...Ch. 7 - Based on current dividend yields and expected...Ch. 7 - Consider the following data for a single index...Ch. 7 - Assume both portfolios A and B are well...Ch. 7 - Prob. 29PSCh. 7 - Prob. 30PSCh. 7 - Et Ch. 7 - Suppose two factors are identified for the U.S....Ch. 7 - Suppose there are two independent economic...Ch. 7 - As a finance intern at Pork Products, Jennifer...Ch. 7 - Suppose the market can be described by the...Ch. 7 - Which of the following statements about the...Ch. 7 - Kay, a portfolio n1anacr at Collins Asset...Ch. 7 - Prob. 3CPCh. 7 - Jeffrey Bruner, CFA, uses the capital asset...Ch. 7 - Prob. 5CPCh. 7 - According to CAPM, the expected rate of a return...Ch. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - 9. Briefly explain whether investors should expect...Ch. 7 - Assume that both X and Y are well-diversified port...Ch. 7 - Prob. 11CPCh. 7 - 12. A zero-investment, well-diversified portfolio...Ch. 7 - 13. An investor takes as large a position as...Ch. 7 - In contrast to the capital asset pricing model,...Ch. 7 - Prob. 1WMCh. 7 - Prob. 2WMCh. 7 - Prob. 3WMCh. 7 - a. Which of the stocks would you classify as...
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