FNCE30001 Study Guide - Midterm Guide: Standard Deviation, Utility, Rade People

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lavendermoose527

21 Nov 2018

School

University of Melbourne

Department

Finance

Course

FNCE30001

Professor

Brown

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Document Summary

You currently have 000 invested in p and 000 invested in f. if your utility function is. The correlation between a and b is -0. 3. Semester 2, 2009: 0. 4, 0. 6, 0. 7, 0. 9, 1. 1, in lecture 3 (chapter 8: index models), we discussed the treynor-black procedure of using alphas, variances, and betas to actively combine risky assets into a portfolio. A and blend them with an index portfolio m. M = 0. 30, (ea) > (eb) = (ec) 333-301 investments: assume that a single factor model properly captures returns and that you have correctly identified the factor. There are two assets (not necessarily stocks) a & b, with e[ra] e[rb]. If e[ra] > e[rb], there is an arbitrage opportunity. If a & b are well-diversified portfolios and a = b, arbitrage is possible. The two factor portfolios are denoted x and y. For a 50-asset portfolio p, p,x = 0. 8 and p,y = 0. 4.

Related Questions

1. The Treasury bill rate is 4percent, and the expected return on the market portfolio is 12percent. Using the capital asset pricing model:

b. What is the risk premium on the market?
c. What is the required return on an investment with a beta of1.5?
d. If an investment with a beta of .8 offers an expected return of9.8 percent does it have a positive NPV?
e. If the market expect a return of 11.2 percent from Stock X, whatis its beta?

2. Percival Hygiene has $10 million invested in long-term corporatebonds. This bonds portfolios expected annual rate of return is 9percent and annual standard deviation is 10 percent.
Amanda Reckcon with, Percival's financial adviser recommends thatPercival consider investing in an index fund which closely tracksthe Standard and Poor's 500 index.

a.Suppose Percival put all his money in a combination of index fundand treasury bills. Can he thereby improve his expected rate ofreturn without changing the risk of portfolio . The treasury billyield is 6 percent.
b.Could Percival do even better by investing equal amount in thecorporate bond portfolio and the index fund? The correlationbetween the bond portfolio and the index fund is + 1.

beigegoose437

There are three securities available for investment: Security A has an expected return of 10% and standard deviation of 20%; Security B has an expected return of 15% and standard deviation of 25%; Security C expected return of 8% and standard deviation of 0%. The covariance between the returns on the Security A and the Security B is -0.05.

a)What is the lowest level of risk (standard deviation) you can achieve by investing in the Security A and the Security B only? Show how you can create such portfolio.

b)What is the equation of the CAL connecting Security A and Security C? What is the reward-to-variability (Sharpe) ratio associated with this CAL?

c)If you decide to invest $50 in Security A and $150 in Security B, what are the expected return and the standard deviation of the resulting portfolio?

d)What should be a degree of risk aversion of an investor who is indifferent between investing in the Security A and the Security B?

limeeagle576

After selling 12.75 million shares in Alibabaâs IPO founder Jack Ma received $867m which he wishes to invest wisely. He has contacted three young and very eager investment managers to research the market opportunities and propose an optimal investment portfolio. The best candidate will have the chance to become Maâs wealth manager. Ma will not hire candidates that propose either inefficient or infeasible portfolios. Assume that all securities are priced according to the CAPM and that the risk free rate is 2%. The expected excess return on the market portfolio is 8% and the standard deviation is 20%. The three candidates proposed portfolios with the following characteristics: Expected Return Standard Deviation Candidate: Bo Expected Return: 8% Standard Deviation: 10% Candidate: Michael Expected Return: 12% Standard Deviation: 25% Candidate: Aditi Expected Return: 13% Standard Deviation: 30% 1. Who do you think will be hired by Ma and why? 2. How can the expected return of the wining portfolio be achieved? Specify the amount invested in each asset/portfolio of assets? 3. What is the beta of the winning portfolio? 4. If Ma holds his position for one year what is the total amount of money he expects to earn on his investment? Show all of your calculations and explain your approach.

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FNCE30001 Study Guide - Midterm Guide: Standard Deviation, Utility, Rade People

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