Question
In: Finance
You are a conservative investor. You hold only a total market index mutual fund and Treasury-bills. Currently the market...
- You are a conservative investor. You hold
only a total market index mutual fund and
Treasury-bills. Currently the market index has an
expected return of 10% and a standard deviation of 24% and the
T-bills promise a 3% return. You are evaluating the
desirability of three different portfolios, 100% in the market
index, 75% in the index and 25% in T-bills, and 50% in each.
- What is the expected return and standard deviation of each of the three portfolios?
- What is the beta of each of the three portfolios?
- What is the risk premium on the index portfolio?
- What criterion would you use to choose between the three candidates?
- BONUS: What are the expected return, standard deviation, and
beta of your portfolio if you have $100,000 of your own to invest
and you borrow another $100,000 at the risk free rate so you can
buy $200,000 of the market index?
Use the table below for (A), (B) and (E)
|
Expected Portfolio Return |
Portfolio Standard Deviation |
Portfolio Beta |
|
|
100% in Market Index 0% in Treasury-Bills |
? ? ? |
? ? ? |
? ? ? |
|
75% in Market Index 25% in Treasury-Bills |
? ? ? |
? ? ? |
? ? ? |
|
50% in Market Index 50% in Treasury-Bills |
? ? ? |
? ? ? |
? ? ? |
|
+200% in Market Index -100% in Treasury-Bills |
? ? ? |
? ? ? |
? ? ? |
Solutions
Expert Solution
What is the expected return and standard deviation of each of the three portfolios?
Provided Above = Weight of Market Index * Standard Deviation of Market Index
What is the beta of each of the three portfolios?
Provided Above Beta of Market Index is always equal to 1. Beta = Weight of market index * Beta of Market Index
What is the risk premium on the index portfolio?
Risk Premium = Market Return - Risk Free Rate = 10% - 3% = 7%
What criterion would you use to choose between the three candidates?
I would use sharpe ratio to calculate reward to risk ration to choose best stock
BONUS: What are the expected return, standard deviation, and beta of your portfolio if you have $100,000 of your own to invest and you borrow another $100,000 at the risk free rate so you can buy $200,000 of the market index?
Expected Return = Calculated above = 17%
standard deviation = Calculated above = 48%
Beta = calculated above = 2
jeff jeffy answered 3 years agoRelated Solutions
You are a conservative investor. You hold only a total market index mutual fund and Treasury-bills. Currently the...
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Year
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2017
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2019
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Year
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Market
Risk-Free
2011
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%
–33.50
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2
%
2012
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6
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Calculate Jensen’s alpha for the fund, as well as its
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You have been given the following return information for a mutual fund, the market index, and...
You have been given the following return information for a
mutual fund, the market index, and the risk-free rate. You also
know that the return correlation between the fund and the market is
.95. Year Fund Market Risk-Free 2015 −23.00 % −43.50 % 3 % 2016
25.10 21.40 5 2017 14.30 15.10 2 2018 6.80 8.80 6 2019 −2.34 −5.20
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mutual fund, the market index, and the risk-free rate. You also
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0.97.
Year
Fund
Market
Risk-Free
2011
–18.8
%
–36.5
%
1
%
2012
25.1
20.7
6
2013
13.6
13.0
2
2014
7.0
8.4
6
2015
–1.92
–4.2
2
What are the Sharpe and Treynor ratios for the fund? (Do
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Year
Fund
Market
Risk-Free
2011
–15.20
%
–30.50
%
3
%
2012
25.10
20.10
4
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13.00
11.20
2
2014
7.40
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Calculate Jensen’s alpha for the fund, as well as its
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Year
Fund
Market
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2015
-16.4%
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3%
2016
25.1
20.3
4
2017
13.2
11.8
2
2018
6.2
8.0
5
2019
-1.68
-3.2
3
What are the Sharpe and Treynor ratios for the fund? (Do
not round intermediate calculations. Round your answers to 4
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Year
Fund
Market
Risk-Free
2015
−15.2
%
−30.5
%
3
%
2016
25.1
20.1
4
2017
13.0
11.2
2
2018
7.4
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5
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2
What are the Sharpe and Treynor ratios for the fund?
Sharpe=
Treynor=
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