Question

In: Finance

A universe of securities includes a risky stock (X), a stock-index fund (M), and T-bills. The...

A universe of securities includes a risky stock (X), a stock-index fund (M), and T-bills. The data for the universe are:

Expected Return Standard Deviation

X

20%

60%

M 15% 25%
T-Bill 5% 0%

The correlation coefficient between X and M is -0.8

A. Draw the opportunity set of securities X and M

B. Find the optimal risky portfolio (O), its expected return, standard deviation, and Sharpe ratio. Compare with the Sharpe ratio of X and M

C. Find the slope of the CAL generated by T-bills and portfolio O.

D. Suppose an investor places 2/9 (i.e., 22.22%) of the complete portfolio in the risky portfolio O and the remainder in T-bills. Calculate the composition of the complete portfolio, its expected return, SD, and Sharpe ratio.

Solutions

Expert Solution

.


Related Solutions

Ryan wishes to allocate his money between T-bills and the risky BJKHD fund. He expects there...
Ryan wishes to allocate his money between T-bills and the risky BJKHD fund. He expects there is a 20% chance of a recession, a 50% chance of normal growth, and a 30% chance of an expansion. On average, BJKHD has had returns of -5% in recessions, returns of 10% in normal growth periods, and returns of 15% in expansions. What is the standard deviation of a complete portfolio that has 60% of his investment dollars in the BJKHD and the...
Securities in the money market includes all except: A. bonds B. T-bills C. commercial paper D....
Securities in the money market includes all except: A. bonds B. T-bills C. commercial paper D. banker’s acceptance
Given the following data about risky portfolios P and M and the risk-free asset (T-bills): State...
Given the following data about risky portfolios P and M and the risk-free asset (T-bills): State State 1 (recession) State 2 (normal) State 3 (boom) State probability 0.4 0.4 0.2 Return, P -0.15 0.15 0.45 Return, M -0.18 0.28 0.35 Return, T-bills 0.05 0.05 0.05 Find the expected return, variance, standard deviation, and Sharpe ratio of P Find the expected return, variance, standard deviation, and Sharpe ratio of M Find the covariance between P and M Assuming M is the...
The ABC Fund, the Karachi Stock Exchange and T-Bills have had the following returns over the...
The ABC Fund, the Karachi Stock Exchange and T-Bills have had the following returns over the past 5 years: Year                T-bill                           KSE                            ABC Fund                                     Returns %                 Return%                    Return%             2011                10                                10                                14             2012                18                                - 8                                - 10             2013                14                                20                                26             2014                12                                18                                22             2015                16                                24                                30                                                                                                                         Required; Determine the Fund’s beta coefficient for the 5 year period of time. Determine the Fund’s alpha coefficient for the 5 year. Comments...
You are considering investing $2,500 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y
You are considering investing $2,500 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in Pare 75% and 25% respectively. X has an expected rate of return of 18%, and Y has an expected rate of return of 14%. To form a complete portfolio with an expected rate of return of 8%, you should...
You are considering investing $10,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 3.75% and a risky portfolio, P, constructed with two risky securities, X and Y.
You are considering investing $10,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 3.75% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 32.7% and 67.3%, respectively. X has an expected rate of return of 8.5%, and Y has an expected rate of return of 13.8%. The dollar values of your positions in X, Y, and Treasury bills would be...
There are two risky assets. The first is a stock fund, and the second is a...
There are two risky assets. The first is a stock fund, and the second is a long-term government and corporate bond fund. The probability distribution of risky funds is as follows: Expected ret. std. dev. stock fund 0.11 0.23 bond fund 0.5 0.1 The correlation between the fund returns is 0.03. T-bill rate is 0.37. A portfolio has 40% of assets invested in the stock fund and 60% of assets invested in the bond fund. What is the standard deviation...
1/ You invest in a portfolio that has 2 assets: T-bills and a risky asset that...
1/ You invest in a portfolio that has 2 assets: T-bills and a risky asset that has a beta of 1.6. If you want a portfolio with a beta of 1.2, how much should you invest in each asset? 2/ An analyst at MGK Inc tells you that if you invest in CitrusJuice shares today, you will receive of a return of 11%. Should you invest in the share based on this advice? Why or why not? Beta of the...
The optimal risky portfolio constructed using the stock fund and the bond fund should be (wstock=40%,...
The optimal risky portfolio constructed using the stock fund and the bond fund should be (wstock=40%, wbonds=60%). The optimal risky portfolio’s expected return is 15%, and its standard deviation is 27%. The risk-free rate is 5%.   Jessica has a risk aversion level of 3. In her optimal complete portfolio, what is the proportion of the stock fund? Round your answer to 4 decimal places. For example, if your answer is 3.205%, then please write down 0.0321.
The most liquid of the money market securities are a. T-Bills. b. commercial paper. c. banker's...
The most liquid of the money market securities are a. T-Bills. b. commercial paper. c. banker's acceptances. d. repurchase agreements. e. Fed funds.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT