Answers to Warm-Up Exercises E8-1. Total annual return Answer: ($0 $12‚000 $10‚000) $10‚000 $2‚000 $10‚000 20% Logistics‚ Inc. doubled the annual rate of return predicted by the analyst. The negative net income is irrelevant to the problem. E8-2. Expected return Answer: Analyst 1 2 3 4 Total Probability 0.35 0.05 0.20 0.40 1.00 Return 5% 5% 10% 3% Expected return Weighted Value 1.75% 0.25% 2.0% 1.2% 4.70% E8-3. Comparing the risk of two investments Answer: CV1 0.10 0.15 0.6667 CV2 0.05
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Integrated Case 8-23 Merrill Finch Inc. Risk and Return Assume that you recently graduated with a major in finance. You just landed a job as a financial planner with Merrill Finch Inc.‚ a large financial services corporation. Your first assignment is to invest $100‚000 for a client. Because the funds are to be invested in a business at the end of 1 year‚ you have been instructed to plan for a 1-year holding period. Further‚ your boss has restricted you to the investment alternatives
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Suggested Answers to Previous Semesters Exam Questions Question 4 (Semester 2‚ 2005) 96633337 Juan (a) Expected Portfolio Return and Risk Expected Return Risk Covariance = (0.002)(0.06)(0.09)=0.0000108 (b) Minimum Variance (Pendix Ltd) The minimum variance for this portfolio is 0.693‚ indicating that risk is minimized when 69.3 percent of the portfolio is invested in Pendix’s shares. A rational investor would not allow Pendix’s shares to
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Question Two In this question‚ with the data provided we estimate each portfolio’s security characteristic line (SCL) and obtain an estimate of its true beta coefficient; then we use the findings to estimate and plot the Security Market Line (SML). In doing so‚ we have two purpose to fulfill. First‚ demonstrating the fact that the total variance of a portfolio approaches the systematic variance as diversification increases‚ which means diversifying across industries offer benefit over diversifying
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Which of the following is incorrect‚ regarding the beta? Select one: a. Beta for market portfolio is less than one b. Assets with beta less than one are said to have lower systematic risk c. Beta is a measure of total risk d. Beta for market portfolio is less than one and beta is a measure of total risk Shares in Flamingo Hotel Holdings have a beta of 2.7. If the expected return on the market portfolio is 8.2% and the risk free rate is 3.3%‚ what return should investors demand on Flamingo
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Q1. Calculating Inputs We chose assets from the 1990s‚ which was one of the most prolific decades in market history thanks in large part to the tech bubble. We chose to calculate average returns as 12x the monthly average return. This annualizes our return‚ which provides a better representation of returns by including more data points to perform analysis. The arithmetic calculation provides an impartial estimate of future return because it is always more than the geometric. All assets classes
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Marked Problem Set 2 Dagoberto Gonzalez Paez Student ID --65824138 November 28‚ 2013 1. Suppose that you can trade a riskless asset that yields 5% and two risky assets A and B. The expected return of asset A is 8% and that of asset B is 11%‚ while the standard deviation of asset A is 14% and that of asset B is 23%. The covariance between assets A and B is ?0:0322. Solution . rA‚B= CovAR(A‚B) / [(σA)(σB)] = -0.0322 / (14%)(23%) rA‚B = -1 But when rA‚B = -1
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Sauder School of Business Finance Division COMM 371 Sep-Dec 2011 Gonzalo Morales Marked Problem Set 2 - Solution Notes 1. First‚ compute the correlation coefficient between assets A and B ρ(RA ‚ RB ) = Cov (RA ‚ RB ) −0.0322 = = −1. σ (RA )σ (RB ) 0.14 × 0.23 The assets are perfectly negatively correlated. Consider portfolio P formed from assets A and B such that you invest α fraction of your wealth into A and (1 − α) fraction into B. The variance of such portfolio is σ (RP
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Portfolio Management Case 1: Alex Sharpe’s Portfolio Executive Summary As Alex Sharpe’s consultant‚ we recommend a portfolio of 78% S&P 500 and 22% of R.J Reynolds. This portfolio will generate an annual expected return of 8.86% (significantly higher than the index return 6.29%)‚ while the risk increases by only less than 10%. In Qualitative Analysis‚ we find that tobacco industry tends to move with the market less than the toy industry‚ which indicates that R.J Reynolds can diversity the
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Problem Set 3 - FINA 4200 Spring 2013 Due Wednesday February 26th before class I. Multiple Choices Chapter 2 1. According to the Capital Asset Pricing Model‚ investors are primarily concerned with portfolio risk‚ not the isolated risks of individual stocks. Thus‚ the relevant risk is an individual stock’s contribution to the overall riskiness of the portfolio. a. True b. False 2. Diversifiable risk‚ which is measured by beta‚ can be lowered by adding more stocks to a portfolio.
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