PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 8, Problem 8PS
Portfolio risk and return Percival Hygiene has $IO million invested in long-term corporate bonds. This bond portfolio's expected annual
- a) Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 6%.
- b) Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is + .l.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Please explain using Excel and show/explain formulas.
Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio’s expected annual rate of return is 8%, and the annual standard deviation is 10%. Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor’s 500 index. The index has an expected return of 13%, and its standard deviation is 14%.
a. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 3%.
multiple choice
Yes
No
b. Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +0.3.
multiple choice
Yes
No
1.
What is your expected portfolio return of an investment portfolio with a 60/40 allocation of stocks and bonds, respectively, if you expect long term equities to return 8%, and long term bonds to return 2%?
5.6%
6.2%
4.8%
5.1%
2.
You are looking into developing your first investment portfolio. After assessing your risk tolerance, you believe that an 90/10 allocation of stocks and bonds, respectively, is where you want to begin. You believe that 7% is what stocks will return over the next ten years, and 4% is what you expect to return in your bond portfolio. If you invest $300/month for the next ten years, what will your portfolio be worth?
$51,077
$47,579
$52,843
$44,880
**Please solve using Excel and show formulas.**
Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio’s expected annual rate of return is 13%, and the annual standard deviation is 12%. Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor’s 500 index. The index has an expected return of 18%, and its standard deviation is 17%.
The correlation between the bond portfolio and the index fund is +0.2.
Question: If percival invests 70% in the corporate bond portfolio and 30% in index fund, what would be the expected rate of return and the standard deviation of this investment?
Multiple Choice
The expected rate of return = 14.5% and the standard deviation = 12.2%
The expected rate of return = 14.5% and the standard deviation = 9.2%
The expected rate of return = 15.5% and the standard deviation = 11.3%
The expected rate of return…
Chapter 8 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 8 - Efficient portfolios For each of the following...Ch. 8 - Efficient portfolios Figure 8.11 purports to show...Ch. 8 - Portfolio risk and return Look back at the...Ch. 8 - Portfolio risk and return Mark Harrywitz proposes...Ch. 8 - Portfolio risk and return Ebenezer Scrooge has...Ch. 8 - Portfolio risk and return Here are returns and...Ch. 8 - Portfolio risk and return Percival Hygiene has IO...Ch. 8 - Sharpe ratio Use the long-term data on security...Ch. 8 - Portfolio beta Refer to Table 7.5. a. What is the...Ch. 8 - CAPM True or false? Explain or qualify as...
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...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Your client, Sandra is considering three assets: a bond mutual fund, a cryptocurrency ETF, and US Treasury bills. The annualized T-bill rate is 2%. The information below refers to the two risky assets. Expected return Standard deviation Bond mutual fund Cryptocurrency ETF 3% 10% Correlation coefficient 0 14% 20% (a) What are the proportions of each asset, in Sandra's optimal risky portfolio? (b) Suppose the return for each risky asset follows a normal distribution. What is the 1% value-at-risk for Sandra's optimal risky portfolio? Hint: P(Z<-2.326) = 0.01 where Z~N(0, 1).arrow_forwardA firm of investment looking for optimal investment portfolio for its client The client wants to invest a total of 10 million SEK at most and demands the maximum tum. The proposal is to invest in stocks with an expected return of 1% pa. in bonds with an expected return of 6% pa and into share certificates with an expected yield of 7% pa . The investment tim rated the riskiness of the investment in stocks 9 points per invested Krona in bonds 8 points per invested Krona and in share certificates 5 points per invested Krona , and the cient does not want the riskiness of the investment to exceed the limit of 80 million points. At the same time, the liquidity of the investment in stocks was rated 4 points per invested Krona in bonds, 3 points per invested Krona and in share certificates 1 points per invested Krona , and the client wants the total liquidity of the investment to at least 20 million points . Find optimal portfolio for the client ?arrow_forwardMartin Brown is a fixed-income portfolio manager who works with large institutional clients. Brown is meeting with Sarah Redi, a consultant to the Horizon Redi Pension Plan, to discuss the management of the fund's, approximately R100 million. Treasury bond portfolio. The current Treasury yield curve is given in the following table. Maturity (years) 1 12 3 4 YTM (%) 6.0 8.0 9.0 9.5 Assume that the liquidity premiums for the one-year, two-year and three-year maturities (one year from now) are 1% 2.33% and 4%, respectively, determine the expected spot rates in one years time for the one, two, and three year maturing bonds.arrow_forward
- Consider the possible rates of return that Mr. Bernabe might earn next year on a $50,000 investment in Aboitiz Energy or on a $50,000 investment in ACEN. The securities of Aboitiz and ACEN have the expected return and standard deviation given below; the expected correlation between the stocks is 0.1. Compute the return and risk of the portfolio: 50% Aboitiz and 50% ACEN Aboitiz Expected Return Standard Deviation E/R=11.5%; SD=18.84% E/R=12.5%; SD=18.30% OE/R-10.5%; SD=18.84% OE/R-11.5%; SD=22.41% 14% 20% ACEN Expected Return Standard Deviation 9% 30%arrow_forwardA portrollo consists of assets with the following expected returns: Technology stocks Pharmaceutical stocks Utility stocks Savings account a. What is the expected return on the portfolio if the investor spends an equal amount on each asset? Round your answer to two decimal places. % 26% 16 9 4 b. What is the expected return on the portfolio if the investor puts 53 percent of available funds in technology stocks, 15 percent in pharmaceutical stocks, 14 percent in utility stocks, and 18 percent in the savings account? Round your answer to two decimal places. %arrow_forwardSuppose you form a portfolio consisting of $31,000 invested in a mutual fund with beta of 1.6, $18,000 invested in Treasury securities $19,000 invested in an index fund with the same beta as the entire market. Expected market risk premium is 6.3%. Risk-free rate is 0.8% What is the exped return of this portfolio according to the CAPM? O a. 6.9% Ob. 6.6% O c. 7.2% d. 9.1% e. 5.8%arrow_forward
- In addition to risk-free securities, you are currently invested in the TanglewoodFund, a broad-based fund of stocks and other securities with an expected return of 14% and a volatility of 24%. Currently, the risk-free rate of interest is 3%. Your broker suggests that you add a venture capital fund to your current portfolio. The venture capital fund has an expected return of 20%, a volatility of 79 %, and a correlation of 0.2 with the Tanglewood Fund. Assume you follow your broker's advice and put 50% of your money in the venture fund: a. What is the Sharpe ratio of the Tanglewood Fund? Answer (Already calculated): Sharpe ratio of the Tanglewood Fund is: 0.458 b. What is the Sharpe ratio of your new portfolio? c. What is the optimal Sharpe ratio you can obtain by investing in the venturefund? (Hint: Use Excel and round your answer to three decimal places.) Please use excel for last question, four people from chegg has gotten this question wrong. Please get it rightarrow_forwardYou create a portfolio consisting of $23000 invested in a mutual fund with beta of 1.3, $25000 invested in Treasury Securities (assume risk-free), and $12000 invested in an index fund tracking the market. According to surveys, the expected market risk premium is 6.6%, risk free rate is 1.3%. What is the expected return of this portfolio according to CAPM? Answer in percent, rounded to one decimal place.arrow_forwardAssuming risk free rate to be 2% p.a while market return is expected to be 8% return with a Standard Deviation of 10%, answer the following question using Markowitz Model of lending and borrowing at risk free rate Questions : a) River Park fund aims to earn a 12% Return on their Portfolio comprising of equities tracking the Dow Jones and Risk free Securities. To achieve this goal, how much risk will they have to assume? Show the risk return combination for the fund with the weightsarrow_forward
- In addition to risk free securities, you are currently invested in the Tanglewood Fund, a broad-based fund of stocks and other securities with an expected return of 14% and a volatility of 24%. Currently, the risk-free rate of interest is 3%. Your broker suggests that you add a venture capital fund to your current portfolio. The venture capital fund has an expected return of 20%, a volatility of 79%, and a correlation of 0.2 with the Tanglewood Fund, Assume you follow your broker's advice and put 50% of your money in the venture fund: a. What is the Sharpe ratio of the Tanglewood Fund? b What is the Sharpe ratio of your new portfolio?c. What is the optimal Sharpe ratio you can obtain by investing in the venture fund? (Hint: Use Excel and tourid your answer to three decimal places.)arrow_forwardAn investor wishes to invest some or all of his $12.5 million in a diversified portfolio through a commercial lender. The types of investments, the expected interest per year, and the maximum allowed percentage investment he will consider are shown on the following table. He wants at least 35% of his investments to be in nonmortgage instruments and no more than 60% to be in high-yield (and high-risk) instruments (i.e., expected interest > 8%). How should his investment be diversified to make the most interest income? Investment Expected Return Maximum Allowed Low-income mortgage loans 6.50% 20% Conventional mortgage loans 6.00% 30% Government sponsored mortgage loans 8.25% 25% Bond investments 5.75% 15% Stock investments 8.75% 18% Futures trading 9.25% 10%arrow_forwardIn addition to risk-free securities, you are currently invested in the Tanglewood Fund, a broad-based fund of stocks and other securities with an expected return of 14% and a volatility of 24%. Currently, the risk-free rate of interest is 3%. Your broker suggests that you add a venture capital fund to your current portfolio. The venture capital fund has an expected return of 20%, a volatility of 79%, and a correlation of 0.2with the Tanglewood Fund. Assume you follow your broker's advice and put 50% of your money in the venture fund: a. What is the Sharpe ratio of the Tanglewood Fund?Answer (already calculated)= 0.458 b. What is the Sharpe ratio of your new portfolio?Answer (Already calculated)= 0.322 c. What is the optimal Sharpe ratio you can obtain by investing in the venture fund? (Hint: Use Excel and round your answer to three decimal places.)The optimal Sharpe ratio you can obtain by investing in the venture fund is *enter your response here* and the percentage in…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Chapter 8 Risk and Return; Author: Michael Nugent;https://www.youtube.com/watch?v=7n0ciQ54VAI;License: Standard Youtube License