To determine: Expected return on portfolio and the risk of the portfolio.
Explanation of Solution
Calculation of expected return on security A:
Therefore, expected return on security A is 12%
Calculation of expected return on security B:
Therefore, expected return on security B is 16.15%
Calculation of expected return on security C:
Therefore, expected return on security C is 12%
Calculation of expected return on portfolio:
Therefore, expected return on portfolio is 14.93%
Calculation of standard deviation of stock A, B and C
Calculation of standard deviation of portfolio:
Therefore, standard deviation of the portfolio is 2.07%
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Chapter 8 Solutions
Contemporary Financial Management, Loose-leaf Version
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- The following figures show the optimal portfolio choice for two investors with different levels of risk-aversion graphically. Which statement is correct? E[R] 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 Figure 1 0.2 0.25 0.3 0.35 o(R) 0.4 0.45 [H]Z 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 Figure (2) shows an investor that borrows in risk-free rate and invests in the risky asset. Figure (1) shows an investor with a conservative investment behavior. In the optimal point of both figures, the highest indifference curve is tangent to the efficient frontier. In Figure (1), more aggressive investment decision led to a higher Sharpe ratio. 0.15 Figure 2 0.2 0.25 o (R) 0.3 0.35 0.4 0.45arrow_forwardProblem 4. Consider tuo scenarios, wi with probability and w with probability Suppose that the return on sonie security is K retum on another security is K uch that the tu0 socurities hane the same risk = -2% in the first scenario and K = 6% in the second scenario. If the = -3% in the first scenario, find the return K in the other scenarioarrow_forwardConsider the following information for four portfolios, the market, and the risk-free rate (RFR): Portfolio Return Beta SD A1 0.15 1.25 0.182 A2 0.1 0.9 0.223 A3 0.12 1.1 0.138 A4 0.08 0.8 0.125 Market 0.11 1 0.2 RFR 0.03 0 0 Refer to Exhibit 18.6. Calculate the Jensen alpha Measure for each portfolio. a. A1 = 0.014, A2 = -0.002, A3 = 0.002, A4 = -0.02 b. A1 = 0.002, A2 = -0.02, A3 = 0.002, A4 = -0.014 c. A1 = 0.02, A2 = -0.002, A3 = 0.002, A4 = -0.014 d. A1 = 0.03, A2 = -0.002, A3 = 0.02, A4 = -0.14 e. A1 = 0.02, A2 = -0.002, A3 = 0.02, A4 = -0.14arrow_forward
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