PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 8, Problem 4PS
Portfolio risk and return Look back at the calculation for Southwest Airlines and Amazon in Section 8-1.
- a) Recalculate the expected portfolio return and standard deviation for different values of x1, and x2, assuming the correlation coefficient ρ12 = 0. Plot the range of possible combinations of expected return and standard deviation as in Figure 8.3.
- b) Repeat the problem for ρ12 = +.50.
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The optimal proportion of the risky asset in the complete portfolio is
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y*=
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A0²
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Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items.
Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph
Please answer A, B, C & D
Consider the expected return and standard deviation of the following two assets:
Asset 1: E[r1]=0.1 and σ1=0.2
Asset 2: E[r2]=0.3 and σ2=0.4
(a) Draw (e.g. with Excel) the set of achievable portfolios in mean-standard deviation
space for the cases: (i) ρ12= -1, (ii) ρ12=0.
(b) Suppose ρ12=-1. Which portfolio has the minimal variance? What is the variance and
expected return of that portfolio?
(c) Derive the formula for the variance of a portfolio with four assets.
Chapter 8 Solutions
PRIN.OF CORPORATE FINANCE
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Ch. 8 - CAPM True or false? a. The CAPM implies that if...Ch. 8 - CAPM Suppose that the Treasury bill rate is 6%...Ch. 8 - CAPM The Treasury bill rate is 4%, and the...Ch. 8 - Cost of capital Epsilon Corp. is evaluating an...Ch. 8 - APT Consider a three-factor APT model. The factors...Ch. 8 - Prob. 18PSCh. 8 - APT Consider the following simplified APT model:...Ch. 8 - Prob. 20PSCh. 8 - Three-factor modelThe following table shows the...Ch. 8 - Efficient portfolios Look again at the set of the...
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