EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 8, Problem 18P
Summary Introduction
To determine: Expected beta of portfolio.
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You are going to invest $50,000 in a portfolio consisting of assets X, Y, and Z, as follows;
What is the expected return of this portfolio?
Calculate the beta coefficient of the portfolio
The UIB company desires to construct a portfolio with 15% expected
return. The portfolio is to consist of some combination of security X and
security Y, which have the following expected returns, standard
deviations of returns, and betas:
Security
Security
Y
Market
Risk free
X
portfolio
return
Expected
8%
19%
13%
2%
return
Standard
6%
15%
4%
deviation
Beta
0.94
1.50
1. Determine the beta of the portfolio.
2. Should UIB invest in the portfolio. Justify.
3. Compute the correlation between security Y and the market portfolio
The UIB company desires to construct a portfolio with 15% expected return. The portfolio is to consist of some combination of security X and security Y, which have the following expected returns, standard deviations of returns, and betas:
Security X
8%
6%
0.94
Security
19%
15%
1.50
Market portfolio
13%
4%
Risk free return
2%
Expected return
Standard deviation
Beta
Determine the beta of the portfolio
Chapter 8 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 8 - Prob. 1QTDCh. 8 - Prob. 2QTDCh. 8 - Prob. 3QTDCh. 8 - Prob. 4QTDCh. 8 - Prob. 5QTDCh. 8 - Prob. 6QTDCh. 8 - Prob. 7QTDCh. 8 - Prob. 8QTDCh. 8 - Prob. 9QTDCh. 8 - Prob. 10QTD
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- The following portfolios are being considered for investment. During the period under consideration, RFR = 0.07.Portfolio Return Beta σiA 0.15 1.0 0.05B 0.20 1.5 0.10C 0.10 0.6 0.03D 0.17 1.1 0.06Market 0.13 1.0 0.04 a. Compute the Sharpe measure for each portfolio and the market portfolio. b. Compute the Treynor measure for each portfolio and the market portfolio. c. Rank the portfolios using each measure, explaining the cause for any differences you find in the rankings.arrow_forwardThe following portfolios are being considered for investment. During the period under consideration, RFR = 0.07. Portfolio Return Beta P 0.15 1.00 0.05 Q 0.09 0.50 0.03 R. 0.21 1.30 0.10 0.18 1.20 0.06 Market 0.12 1.00 0.04 a. Compute the Sharpe measure for each portfolio and the market portfolio. Round your answers to three decimal places. Portfolio Sharpe measure P Q R Market b. Compute the Treynor measure for each portfolio and the market portfolio. Round your answers to three decimal places. Portfolio Treynor measure P Q R Market c. Rank the portfolios using each measure, explaining the cause for any differences you find in the rankings. Portfolio Rank (Sharpe measure) Rank (Treynor measure) P |-Select- v |-Select- v Q -Select- v -Select- V R. -Select- V -Select- v -Select- v -Select- v Market -Select- v -Select- v -Select- v is poorly diversified since it has a high ranking based on the -Select- but a much lower ranking with the -Select-arrow_forwardThe following portfolios are being considered for investment. During the period under consideration, RFR = 0.08. Portfolio Return Beta σi P 0.14 1.00 0.05 Q 0.20 1.30 0.11 R 0.10 0.60 0.03 S 0.17 1.20 0.06 Market 0.12 1.00 0.04 Compute the Sharpe measure for each portfolio and the market portfolio. Round your answers to three decimal places. Portfolio Sharpe measure P Q R S Market Compute the Treynor measure for each portfolio and the market portfolio. Round your answers to three decimal places. Portfolio Treynor measure P Q R S Marketarrow_forward
- Consider the multifactor model APT with three factors. Portfolio A has a beta of 0.8 on factor 1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3. The risk premiums on the factor 1, factor 2, and factor 3 are 3%, 5%, and 2%, respectively. The risk-free rate of return is 3%. The expected return on portfolio A is __________ if no arbitrage opportunities exist. A. 23.0% B. 16.5% C. 13.4% D. 13.5%arrow_forwardAsset X has a beta of 1.7 and an expected return of 15.1%. Asset Y has a beta of .70 and an expected return of 8.50%. The risk-free rate is 4.2%. If you wish to hold a portfolio consisting of assets X and Y and have a portfolio beta equal to 1.0, what is the expected return of the portfolio? The final answer should also be rounded to 5 decimal places.arrow_forwardSuppose you are considering investing your entire portfolio in three assets A, B and C. You expect that after you invest, four possible mutually exclusive scenarios will occur, with associated returns (in %) for each of the three assets as listed below. The probability of each scenario is given below (Attached image). Find the expected returns and standard deviations of Asset A, B & C. (HINT: the expected return is given by the probability-weighted sum of returns in each scenario. The expected standard deviation is given by the square root of the probability-weighted sum of squared deviations from the expected return.) Is there any reason to invest in Asset A given its low expected return and high standard deviation?arrow_forward
- Consider 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_forwardA person is interested in constructing a portfolio. Two stocks are being considered. Letx = percent return for an investment in stock 1, and y = percent return for an investment instock 2. The expected return and variance for stock 1 are e(x) = 8.45% and Var(x) = 25.The expected return and variance for stock 2 are e(y) = 3.20% and Var(y) = 1. Thecovariance between the returns is sxy = −3.a. what is the standard deviation for an investment in stock 1 and for an investment instock 2? Using the standard deviation as a measure of risk, which of these stocks isthe riskier investment?arrow_forwardThe UIB company desires to construct a portfolio with 15% expected return. The portfolio is to consist of some combination of security X and security Y, which have the following expected returns, standard deviations of returns, Security X Security Y Market Risk free rate Expected return 8% 19% 13% 2% Standard deviations 6% 15% 4% Beta 0.94 1.5 1. Determine the beta of the portfolio2. Should UIB invest in the portfolio. Justify.3. Compute the correlation between security Y and the market portfolio.arrow_forward
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