Question

In: Finance

You have $20,000. You plan on purchasing a house in one year, but you will need...

You have $20,000. You plan on purchasing a house in one year, but you will need to have $22,500 for the downpayment. Which of the following is a good investment opportunity to ensure you have the money necessary to make your downpayment in a year?

A portfolio with an expected return of $24,000 and a standard deviation of 10%.

A portfolio with an expected return of $30,000 and a standard deviation of 15%.

All of these options would be a good investment.

A portfolio with an expected return of $27,000 and a standard deviation of 20%.

The adequately diversify your portfolio, you need to do more than just own a variety of securities. Which of the following is a necessary component of a well-diversified portfolio that has a low variance?

The component securities have small or negative correlation coefficients.

The portfolio is reviewed and rebalanced based on updated projections and new information.

All of these answers.

The portfolio's components are in a variety of asset classes, such as commodities and derivatives.

Which of the following statements regarding the Security Market Line (SML) is true?

The slope of the SML is equal to the market risk premium and reflects the risk-return trade off.

The SML graphs unsystematic risk

The x-intercept of the SML is equal to the risk-free interest rate.

All of these answers

Solutions

Expert Solution

1) You have $20,000. You plan on purchasing a house in one year, but you will need to have $22,500 for the downpayment. Which of the following is a good investment opportunity to ensure you have the money necessary to make your downpayment in a year?

We take the lower bound of 95% confidence interval of the options to ensure you have the money necessary to make your downpayment in a year.

95% confidence interval lower bound

A portfolio with an expected return of $24,000 and a standard deviation of 10% => 24000-1.96*0.1*24000 = $19296

A portfolio with an expected return of $30000 and a standard deviation of 15% => 30000-1.96*0.15*30000 = $21180

A portfolio with an expected return of $27000and a standard deviation of 20% => 27000-1.96*0.2*27000= $16416

We select the portfolio with the highest expected return of the 95% confidence interval lower bound

Hence, A portfolio with an expected return of $30000 and a standard deviation of 15% is a good investment opportunity to ensure you have the money necessary to make your downpayment in a year

Which of the following is a necessary component of a well-diversified portfolio that has a low variance?

All of these answers.

More diversified a portfolio is, lesser is the variance of the portfolio. As the correlation between stock in a portfolio becomes small and negative, less intense is the effect of any market conditions on the portfolio. Also, the portfolio needs to be reviewed and updated on regular time intervals based on updated projections and new information. More diversification is achieved on investing in various asset classes since the correlation between such asset classes is usually low or negative

Which of the following statements regarding the Security Market Line (SML) is true?

The slope of the SML is equal to the market risk premium and reflects the risk-return trade-off

The slope of SML is Market returns- Risk-free rate which is the market risk premium. The SML graph represents Beta ie the systematic risk. The y-intercept of the SML is equal to the risk-free interest rate.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You are thinking of purchasing a house that costs $230,000. You have $20,000 in cash for a down payment, but you need to borrow the rest of the purchase price.

You are thinking of purchasing a house that costs $230,000. You have $20,000 in cash for a down payment, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires monthly payments and has an annual interest rate of 4.55%. What will your monthly payments be if you sign up for this mortgage? Create the amortization schedule on a monthly basis using Excel. Calculate the total amount of interest paid...

In purchasing a house that is worth $175,000, you need to obtain a mortgage. Suppose you...

In purchasing a house that is worth $175,000, you need to obtain a mortgage. Suppose you choose a 30year fixed rate mortgage with an interest rate/year of 9.74%. What is the annual payment required? How much of each year's payment goes to paying interest and how much to reducing the principal balance for the first 15 years?

You are thinking of purchasing a house. The house costs 300000.You have 43000 in cash...

You are thinking of purchasing a house. The house costs 300000. You have 43000 in cash that you can use as a down payment on the house but you need to borrow the rest of the purchase price. The bank is offering a 30yr mortgage that requires annual payments and has an interest rate of 5 percent per year. What will be the annual payment?

You are thinking of purchasing a house. The house costs $200,000. You have $29,000 in cash...

You are thinking of purchasing a house. The house costs $200,000. You have $29,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annual payments and has an interest rate of 7% per year. What will be your annual payment if you sign this mortgage?

You are thinking of purchasing a house. The house costs $250,000. You have $36,000 in cash...

You are thinking of purchasing a house. The house costs $250,000. You have $36,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annual payments and has an interest rate of 8% per year. What will be your annual payment if you sign this mortgage?

Part A You are thinking of purchasing a house. The house costs $350,000. You have $50,000...

Part A You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow rest of the purchase price. The bank is offering a 20-year mortgage that requires monthly payments and has an annual interest rate of 5% per year. Determine your monthly payments if you sign up for this mortgage. Draw the amortization schedule, monthly, using Excel. Calculate the...

You are considering purchasing a house for $785,000, which you plan to finance using an 80%...

You are considering purchasing a house for $785,000, which you plan to finance using an 80% LTV conventional mortgage (i.e. no mortgage insurance will be required). First Bank of American Dreams is offering a 30-year, fully amortizing, fixed-rate mortgage at 4.5% with monthly payments. This loan charges a 1% origination fee, 3 discount points, and a 3% prepayment penalty. First compute the APR and then compute the ER assuming that you will sell the home and pay off the loan...

You plan to buy a house for $210,000. You have been offered a 20 year mortgage...

You plan to buy a house for $210,000. You have been offered a 20 year mortgage with a rate of 4.8%. You make a $30,000 down payment. Closing costs are 5%. In the Amortization schedule for the first month, the interest, in dollars and cents, will be $_____ In the Amortization schedule for the first month, payment on principal, in dollars and cents, will be $______ In the Amortization schedule for the first month, the balance on the loan at...

You are saving for a new house and you put $20,000 per year in an account...

You are saving for a new house and you put $20,000 per year in an account paying 8%. The first payment is made today. How much will you have at the end of 3 years? A. $51,541.19 B. $55,665.29 C. $64,928.00 D. $70,122.24 E. $75,732.19

After selling your house and purchasing a new house you have $25,000 left you wish to...

After selling your house and purchasing a new house you have $25,000 left you wish to invest. The first option you have is a one year T-Bill with a par value of $25,000 which costs $23,250. Your second option is to invest in a 12 month CD with a 6.5% interest rate. Of these two available options which would allow you to receive a higher rate of return. Make sure to show your calculations.

Subjects