Question

In: Finance

TRUE or FALSE 1. A riskless or risk-free asset is presumed to have a return with...

TRUE or FALSE

1. A riskless or risk-free asset is presumed to have a return with zero standard deviation.

2. The portfolio variance of a two-asset portfolio has three terms, two related to the individual underlying assets, and one related to the interaction of the two assets.

3. The CAPM (or SML) model determines the risk-adjusted required rate of return for a stock.

Solutions

Expert Solution

1. True.

A riskless or riskfree asset is presumed to have a return with zero standard deviation. Standard deviation is considered as a measure of risk in case of assets. If an asset has a standard deviation greater than 0, it is considered as a risky asset. Therefore, an asset with standard deviation equal to 0 is considered as a risk free asset

2. True

The formula for the portfolio variance for two stocks, A and B with weights w(A) and w(B) respectively:

As observable over here, the first term deals with the variance of stock A and its weightage in the overall portfolio.

The second term deals with the variance of the stock B and its weightage in the overall portfolio.

However, the third terms deals with the correlation between the stock A and B and its combined weightage in the portfolio.

3. True

CAPM models states that the expected return on an asset is equivalent to:

Here r(i) is the return on the asset, r(RF) is the risk free rate of return, r(M) is the return of the market, beta is the movement of stock in relation to the market.

So, the overall formula implies that the expected return on the stock is equal to the risk free rate of return plus the market premium for additional risk taken by investing in the stock.


Related Solutions

There is a riskless asset with a return of 0.020, and a risky asset with an...
There is a riskless asset with a return of 0.020, and a risky asset with an expected return of 0.363 and standard deviation of 0.301. If you were building a portfolio for an investor with a risk aversion of A=2.6, what proportion of their assets would you invest in the risky asset?
1.Suppose you have a riskless asset with a rate of return of 0.05 and a risky...
1.Suppose you have a riskless asset with a rate of return of 0.05 and a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.16. What portfolio combination of these two assets will yield an expected rate of return of 0.08? What is its standard deviation? (2 pts)
The risk-free asset has a return of 1.62%. The risky asset has a return of 8.82%...
The risk-free asset has a return of 1.62%. The risky asset has a return of 8.82% and has a variance of 8.82%. Karen has the following utility function: LaTeX: U=a\times\sqrt{r_{c\:}}-b\times\sigma_cU = a × r c − b × σ c, with a=1.3 and b=8.78. LaTeX: r_cr c and LaTeX: \sigma_cσ c denote the return and the risk of the combined portfolio. The optimal amount to be invested in the risky portfolio is 33.85% . (Note: this solution does not necessarily...
Question1: TRUE OR FALSE 1. The risk premium offered by an asset is determined solely by...
Question1: TRUE OR FALSE 1. The risk premium offered by an asset is determined solely by its specific risk? 2.All other things being equal, a risk-free rate increase increases the value of the call option? 3. Private companies (i.e., not publicly traded) are affected by systematic risk as well as company-specific risk? 4. Market efficiency is due in large part to strong competition among investors?
Making profit by taking no risk is a risk-free arbitrage opportunity. True False
Making profit by taking no risk is a risk-free arbitrage opportunity. True False
If the expected return on a risky asset is 13%, standard deviation is 25%, and the risk free asset 5%.
If the expected return on a risky asset is 13%, standard deviation is 25%, and the risk free asset 5%.Calculate the expected return , standard deviation, sharp ratio for the complete portfolio with y= .60
Question 4: Suppose a risk-free asset has a 3 percent return and a second risky asset...
Question 4: Suppose a risk-free asset has a 3 percent return and a second risky asset has a 15 percent expected return with a standard deviation of 25 percent. Calculate the expected return and standard deviation of a portfolio consisting of 15 percent of the risk-free asset and 85 percent of the second asset. Provide your final answers up to two decimal points
True or False Questions: Please answer true or false. 1. Even when care is free at...
True or False Questions: Please answer true or false. 1. Even when care is free at the point of service, we would expect low and high-income individuals with the same level of need to demand different quantities of health care. 2. We would expect the demand curve for physician visits to be more price elastic than the demand curve for inpatient hospital care. 3. A decision by the provincial governments to include counseling by psychologists within the public insurance plan...
a projects internal rate of return is independent of its level of risk. True or False
a projects internal rate of return is independent of its level of risk. True or False
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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT