Question
In: Finance
Suppose that there are many stocks in the security market and that the characteristics of stocks...
Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows:
|
Stock |
Expected Return |
Standard Deviation |
|
A |
8% |
12% |
|
B |
20% |
24% |
|
Correlation = -1 |
||
A) Suppose that it is possible to borrow at the risk-free rate.
What must be the value of the risk-free rate?
B) What are the risk and return of this minimum risk portfolio?
Solutions
Expert Solution
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jeff jeffy answered 2 years agoRelated Solutions
Suppose that there are many stocks in the security market and that the characteristics of stocks...
Suppose that there are many stocks in the security market and
that the characteristics of stocks A and B are
given as follows:
Stock
Expected Return
Standard Deviation
A
11
%
4
%
B
21
10
Correlation = –1
Suppose that it is possible to borrow at the risk-free rate,
rf. What must be the value of the risk-free
rate? (Hint: Think about constructing a risk-free
portfolio from stocks A and B.) (Do not
round intermediate calculations. Round your answer...
Suppose that there are many stocks in the security market and that the characteristics of stocks...
Suppose that there are many stocks in the security market and
that the characteristics of stocks A and B are
given as follows:
Stock
Expected Return
Standard Deviation
A
11
%
6
%
B
17
9
Correlation = –1
Suppose that it is possible to borrow at the risk-free rate,
rf. What must be the value of the risk-free
rate? (Hint: Think about constructing a risk-free
portfolio from stocks A and B.) (Do not
round intermediate calculations. Round your answer...
Suppose that there are two stocks in the security market. The characteristics of stocks A and...
Suppose that there are two stocks in the security market. The
characteristics of stocks A and B are given as follows:
Stock
Expected Return
Standard Deviation
A
13%
5%
B
15%
15%
The correlation between these two stocks is -1.
Suppose that it is possible to borrow at the risk-free rate, rf.
What must be the value of the risk-free rate? (Hint: Think about
constructing a risk-free portfolio from stocks A and B.)
Suppose that many stocks are traded in the market and that it is possible to borrow...
Suppose that many stocks are traded in the market and that it is
possible to borrow at the risk-free rate, rƒ.
The characteristics of two of the stocks are as follows:
Stock
Expected Return
Standard Deviation
A
8
%
55
%
B
4
%
45
%
Correlation = –1
a. Calculate the expected rate of return on this
risk-free portfolio? (Hint: Can a particular stock
portfolio be substituted for the risk-free asset?) (Round
your answer to 2 decimal places.)
Suppose that many stocks are traded in the market and that it is possible to borrow...
Suppose that many stocks are traded in the market and that it is
possible to borrow at the risk-free rate, rƒ. The characteristics
of two of the stocks are as follows: Stock Expected Return Standard
Deviation A 7 % 30 % B 10 % 70 % Correlation = –1 a. Calculate the
expected rate of return on this risk-free portfolio? (Hint: Can a
particular stock portfolio be substituted for the risk-free asset?)
(Round your answer to 2 decimal places.) Rate...
Suppose that many stocks are traded in the market and that it is possible to borrow...
Suppose that many stocks are traded in the market and that it is
possible to borrow at the risk-free rate, rƒ.
The characteristics of two of the stocks are as follows:
Stock
Expected Return
Standard Deviation
A
10
%
25
%
B
18
%
75
%
Correlation = –1
a. Calculate the expected rate of return on this
risk-free portfolio? (Hint: Can a particular stock
portfolio be substituted for the risk-free asset?) (Round
your answer to 2 decimal places.)
b....
Suppose that many stocks are traded in the market and that it is possible to borrow...
Suppose that many stocks are traded in the market and that it is
possible to borrow at the risk-free rate,
rƒ. The characteristics of two of the
stocks are as follows:
Stock
Expected Return
Standard Deviation
A
10
%
25
%
B
18
%
75
%
Correlation = –1
a.
Calculate the expected rate of return on this risk-free
portfolio? (Hint: Can a particular stock portfolio be
substituted for the risk-free asset?) (Round your answer to
2 decimal places.)
Rate...
Suppose that many stocks are traded in the market and that it is possible to borrow...
Suppose that many stocks are traded in the market and that it is
possible to borrow at the risk-free rate,
rƒ. The characteristics of two of the
stocks are as follows:
Stock
Expected Return
Standard Deviation
A
8
%
40
%
B
11
%
60
%
Correlation = –1
a.
Calculate the expected rate of return on this risk-free
portfolio? (Hint: Can a particular stock portfolio be
substituted for the risk-free asset?) (Round your answer to
2 decimal places.)
Rate...
Suppose that many stocks are traded in the market and that it is possible to borrow...
Suppose that many stocks are traded in the market and that it is
possible to borrow at the risk-free rate, rƒ.
The characteristics of two of the stocks are as follows:
Stock
Expected Return
Standard Deviation
A
8
%
40
%
B
12
%
60
%
Correlation = –1
a. Calculate the expected rate of return on
this risk-free portfolio? (Hint: Can a particular stock
portfolio be substituted for the risk-free asset?) (Round
your answer to 2 decimal places.)
Rate...
Suppose we observe two stocks with the following characteristics:
Suppose we observe two stocks with the
following characteristics: StockExpected returnBetaK20%1.6L12%0.9a. An asset is said to be overvalued
if its price is too high given its expected return and risk. The
risk-free rate is currently 6%. Is one of the two stocks overvalued
relative to the other? Explain your answer fully (i.e., provide
reasons why you think the stock is or is not
overvalued). ...
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