You have the following information on 2 risky securities: a and b. Assume that the Risk-Free...

You have the following information on 2 risky securities: a and b.

Assume that the Risk-Free rate of interest is 2.0% per year. Please show all work.

Scenario	Probability	Return for Security a	Return for Security b
Excellent	25.00%	-10.00%	10.00%
Good	25.00%	5.00%	40.00%
Average	25.00%	15.00%	-24.00%
Bad	25.00%	25.00%	18.00%

a) Find the Expected Return for the Minimum Variance Portfolio (M*) and The Standard Deviation of the Minimum Variance Portfolio (M*).

b) Find the Weight of Security i in the Optimal Portfolio (P*) and The Weight of Security j in the Optimal Portfolio (P*).

c) Find the Expected Return of the Optimal Portfolio (P*) and The Standard Deviation of the Optimal Portfolio (P*).

d) The Sharpe Ratio of Optimal Portfolio (P*) or the Highest Sharpe Ratio

Expert Solution

jeff jeffy answered 2 years ago

Assume the market risk is 8% and risk-free rate is 2%. You have a portfolio with...

Assume the market risk is 8% and risk-free rate is 2%. You have a portfolio with $15,000 invested in Stock A with a beta of 1.2, $8,000 in Stock B with a beta of 1.8, and $12,000 in Stock C with a beta of 2.0. What is the beta and expected return of the portfolio?

You are a financial advisor and offer two risky funds A and B, and a risk-free...

You are a financial advisor and offer two risky funds A and B, and a risk-free money market fund. Fund A has an expected return of 18% and standard deviation of 21%. Fund B has an expected return of 8% and a standard deviation of 12%. The correlation between the two funds is 0.1. The risk free rate is 4%. Your client Derek wants to earn 9% on his investments while taking as little risk as possible. With the above...

Q1) You have a portfolio of one risky asset and one risk-free asset. The risky asset...

Q1) You have a portfolio of one risky asset and one risk-free asset. The risky asset has an expected return of 20% and a variance of 16%. The T-bill rate (that is the risk-free rate) is 6%. Your client Mary is thinking of investing 75% of her portfolio in the risky asset and the remaining in a T-bill. If Mary wants to find a general equation for the expected return and risk of her portfolio what are the equations that...

Consider the following information about a risky portfolio that you manage and a risk-free asset: E(rP)...

Consider the following information about a risky portfolio that you manage and a risk-free asset: E(rP) = 12%, σP = 18%, rf = 3%. a. Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected rate of return on her overall or complete portfolio equal to 6%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? (Do not round intermediate calculations. Round...

Consider the following information about a risky portfolio that you manage and risk-free asset: E (rp)...

Consider the following information about a risky portfolio that you manage and risk-free asset: E (rp) = 12.5%, σp=16%, rf=3.5%. a) Your client wants to invest a proportion of her total investment budget in your risky fund to provide an expected return of on overall complete portfolio equal to 9%. What proportion should she invest in the risky portfolio, P, and what proportion in the risk-free asset? b) What will be the standard deviation of return of return on the...

We have the following information on Stocks A and B. The risk-free rate is 5%, and...

We have the following information on Stocks A and B. The risk-free rate is 5%, and the market risk premium is 6.25%. Assume that the market portfolio is correctly priced. Based on the reward-to-risk ratio, are Stocks A and B overpriced, underpriced, or correctly priced? Stock A Stock B Expected return 10% 15% Beta 0.8 1.5 Select one: a. A is underpriced; B is overpriced. b. A is correctly priced; B is overpriced. c. A is overpriced; B is underpriced....

Consider the following securities: Risky security: E(R) = 10% and standard deviation= 20. Risk-free security: Rf...

Consider the following securities: Risky security: E(R) = 10% and standard deviation= 20. Risk-free security: Rf = 5%. You want to construct a portfolio combining the risky security and the risk-free security such that you get an expected return of 15%. (a) What weights would you need to put in the risky and the risk-free securities to earn a 15%? (b) What is the standard deviation of this portfolio? What is the reward-to- variability ratio? (c) Draw the capital allocation...

7) There are only two securities (A and B, no risk free asset) in the market....

7) There are only two securities (A and B, no risk free asset) in the market. Expected returns and standard deviations are as follows: Security Expected return standard Deviation Stock A 25% 20% Stock B 15% 25% The correlation between stocks A and B is 0.8. Compute the expected return and standard deviation of a portfolio that has 0% of A, 10% of A, 20% of A, etc, until 100% of A. Plot the portfolio frontier formed by these portfolios...

You invest all your money into a risky asset and a risk-free asset. The risky asset...

You invest all your money into a risky asset and a risk-free asset. The risky asset has an expected return of 0.065 and a standard deviation of 0.25, the risk-free asset returns 0.025. What is the return on your combined portfolio if you invest 0.4 in the risky asset, and the remainder in the risk-free asset? Round your answer to the fourth decimal point.

You have observed the following returns over time: Assume the risk-free rate is 3.55% and the...

You have observed the following returns over time: Assume the risk-free rate is 3.55% and the market risk premium is 4.60%. Year Stock A Stock B Market INPUT DATA rRF 3.55% Market Risk Premium 4.60% 1997 14.000% 15.000% 13.143% a. What are the betas of Stocks A and B? 1998 11.000% 9.000% 11.029% bA bB 1999 -2.500% 5.000% 4.109% 2000 14.000% 7.500% 5.097% b. What are the required rates of return for Stocks A and B? 2001 20.000% 13.500% 19.926%...

Question