EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 8, Problem 4P
Summary Introduction
To determine: The value of beta and expected return on the portfolio.
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A portfolio consists of assets with the following expected returns (refer to image):
a. What is the expected return on the portfolio if the investor spends an equal amount on each asset?
b. What is the expected return on the portfolio if the investor puts 50 percent of available funds in technology stocks, 10 percent in pharmaceutical stocks, 24 percent in utility stocks, and 16 percent in the savings account?
Your father asks for an investment advice. Currently, he has Ghc100,000 invested in portfolio P, which has an expected return of 10.5% and a volatility of 8%. Suppose the risk free rate is 5%, and the tangent portfolio has an expected return of 18.5% and a volatility of 13%.
a) To maximize his expected return, without increasing his volatility, which portfolio would you recommend?
b) If your father prefers to keep his expected return the same but minimize his risk, which portfolio would you recommend.
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
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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- You can considering investing in fund with a beta of .75 and a 7% projected annual return. Assuming that the current market returns on the T-bills, T-bonds and S&P 500 are .45%, 1.3% and 5% respectively, is this fund’s projected return worth its risk (ie. Is this a good investment)?arrow_forwardAssume that you manage a $10.00 million mutual fund that has a beta of 1.05 and a 9.50% required return. The risk-free rate is 2.20%. You now receive another $11.50 million, which you invest in stocks with an average beta of 0.82. What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)arrow_forwardAn investor has $1000 initial wealth for investment and he borrows another $500 at the risk free rate. He then invest the entire total amount of $1500 in the market portfolio. What is his portfolio beta?arrow_forward
- Assume that you manage a risky portfolio with an expected rate of return of 14% and a standard deviation of 30%. The T-bill rate is 6%. Your client decides to invest in your risky portfolio a proportion (y) of his total investment budget with the remainder in a T-bill money market fund so that his overall portfolio will have an expected rate of return of 13% a. What is the proportion y? (Enter your answer as a decimal number rounded to 2 decimal places.) Proportion y b. What is the standard deviation of the rate of return on your client's portfolio? (Enter your answer as a percentage rounded to two decimal places.) Standard % per year deviationarrow_forwardAssuming you are an investor with GHS100 available. If you invest GHS60 and GHS40 in Allos Inc. and Orangus Inc. respectively, what will be your portfolio returns? 4.Calculate the Standard deviation of the portfolio.arrow_forwardThe Treasury bill rate is 4.9%, and the expected return on the market portfolio is 11.1%. Use the capital asset pricing model. What is the risk premium on the market? (Enter your answer as a percent rounded to 1 decimal place.) What is the required return on an investment with a beta of 1.2? (Enter your answer as a percent rounded to 2 decimal places.) If an investment with a beta of 0.46 offers an expected return of 8.7%, does it have a positive NPV? If the market expects a return of 12.2% from stock X, what is its beta? (Round your answer to 2 decimal places.)arrow_forward
- You are considering investing in a combination of a stock and a risk-free asset. The stock has an expected return of 17% with a standard deviation of 11% and the riskfree return is 3%. (a) Complete the table below and plot the expected portfolio return as a function of the portfolio standard deviation. (b) Suppose you are investing £1000. What is the meaning of a portfolio invested 150% in the risky asset?arrow_forwardConsider a borrow-and-invest strategy in which you use $1 million of your own money and borrow another $1 million (at the t-bill rate) to invest $2 million in a market index fund. If the risk free interest rate is 5.52 percent and the expected rate of return on the market index fund is 12.68 percent, what is the risk premium on this borrow-and-invest strategy?arrow_forwardSuppose you have $2,000 to invest. The market portfolio has an expected return of 10.5 percent and a standard deviation of 16 percent. The risk-free rate is 3.75 percent. How much should you invest in the risk-free asset if you wish to have a 15 percent return on the portfolio?arrow_forward
- The risk-free rate is currently 3.3%, and the market return is 14.8%. Assume you are considering the following investments: Investment Beta A 1.54 B 1.16 C 0.51 D 0.11 E 2.14 . a. Which investment is most risky? Least risky? b. Use the capital asset pricing model (CAPM) to find the required return on each of the investments. c. Find the security market line (SML), using your findings in part b. d. On the basis of your findings in part c, what relationship exists between risk and return? Explain.arrow_forwardYour client decides to invest $60 million in Flama and $40 million in Blanca stocks. The risk-free rate is 2% and the market risk premium is 4%. The beta of the Flama Stock is 2, and the beta of the Blanca stock is 4. What are the weights for this portfolio? What is the portfolio beta? What is the required return of the portfolio?arrow_forwardAssume that you manage a $12.00 million mutual fund that has a beta of 1.15 and a 9.70% required return. The risk-free rate is 2.20%. You now receive another $15 million, which you invest in stocks with an average beta of 1.05. What is the required rate of return on the new portfolio? Do not round your intermediate calculations.arrow_forward
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