Question

In: Finance

You currently own $20,000 worth of IBM's stock. Suppose that IBM has an expected return of...

You currently own $20,000 worth of IBM's stock. Suppose that IBM has an
expected return of 15% and a volatility of 23%. The market portfolio has
an expected return of 11% and a volatility of 16%. The risk-free rate is 5%.
Assuming the CAPM assumptions hold, what alternative investment has the
highest possible expected return while having the same volatility as IBM?
What is the expected return of this portfolio?

Expert Solution

now we have to create a portfolio consist of Market portfolio and Risk free assets.

Risk free asset have zero risk or its standard deviation or volatility is Zero.

Note- Volatility is also know as the standard deviation or risk

Standard deviation of a portfolio containing a risky asset and a non risky asset =

here, = standard deviation of the Risky asset i.e. Standard deviation of market portfolio = 16%

WA = weight of risky asset or weight of market portfolio.

hence,

23% = 16% *WA

=>WA or weight of market portfolio = 1.4375

weight of risk free asset = 1-WA = 1-1.4375 = -0.4375

it means We have to create a portfolio by-

* Buying market portfolio of = $20000* 1.4375 = $28750

* and by borrowing from risk free asset = $20000*0.4375 = $8750

in simple term we have to borrow $8750 from risk free asset and invest it in market portfolio.

Total investment in market portfolio = Amount available + amount borrowed at risk free

=>Total investment in market portfolio=$20000+$8750 = $28750

Portfolio-

		Amount($)	Weight
Market portfolio	Invest	$28,750	1.4375	($28750/$20000)
Risk free asset	Borrow	-$8,750	-0.4375	(-$8750/$20000)
	Total	$20,000	1.000

volatility or standard deviation of the portfolio = = 16%* 1.4375 = 23%[ Which is same as the volatility of IBM]

Expected return on the portfolio =

	Return	Weight	return*weight
Market portfolio	11%	1.4375	15.8125
Risk free asset	5%	-0.4375	-2.1875

		Highest possible expected return	13.625%

Hence highest possible portfolio return on the portfolio consist of the market portfolio and risk free asset having volatility of 23% is 13.625%.

---------------------------------------------------------------------------------------------

jeff jeffy answered 1 year ago

If you own $20,000 of stock A and $20,000 of stock B, and Stock A has...

If you own $20,000 of stock A and $20,000 of stock B, and Stock A has an expected return of 35% while stock B has an expected return of 15%, what is the expected return of the portfollio?

Suppose the annual risk-free rate is 1%. The expected annual return on IBM stock and its...

Suppose the annual risk-free rate is 1%. The expected annual return on IBM stock and its standard deviation is 5% and 0.25%, respectively. If a portfolio consisting of the risk-free asset and IBM stock yields a 2% annual return, what is the risk of the portfolio as measured by standard deviation? a. 0.0345%. b. 0.0425%. c. 0.0515%. d. 0.0625%. e. None of the above.

You own $3,300 worth of stock in a company that is expected to pay dividend of...

You own $3,300 worth of stock in a company that is expected to pay dividend of $12 per share in 1 year and a liquidating dividend of $45 per share in 2 years. The required return on stock is 20%. Your preference is to receive equal dividends in each of the next 2 years. Show how you would accomplish this by creating homemade dividends.

You own stock with an overall expected return of 18.32 percent. The economy is expected to...

You own stock with an overall expected return of 18.32 percent. The economy is expected to either boom or be normal. There's a 65 percent chance the economy will boom. If the economy booms, the stock is expected to return 23 percent. What's the expected return on the stock if the economy is normal? A. 8.51% B. 9.63% C. 11.84% D. 10.25% Please show work.

You currently Own a portfolio of two stocks. JH Chemical has an expected return of 11%...

You currently Own a portfolio of two stocks. JH Chemical has an expected return of 11% with a standard deviation of 15% while AAC Agriculture has an expected return of 15% with a standard deviation of 20%. The correlation coefficient between these two stocks is 0.30. A. If you invest $14,000 in JH and $6,000 in AAC, what is the expected return and standard deviation of the portfolio? Was risk reduced relative to the individual risk of each security? Why?...

Suppose the domestic U.S. beta of IBM is 1.0, the expected return on the U.S. market...

Suppose the domestic U.S. beta of IBM is 1.0, the expected return on the U.S. market portfolio is 12 percent, and that the U.S. T-bill rate is 6 percent. At same time, suppose the world beta measure of IBM is 0.80 and the expected return on the world market portfolio is 14%. Find the cost of equity capital for IBM assuming that the U.S. market is fully integrated. Find the cost of equity capital for IBM assuming that the U.S....

You own a dividend-paying stock currently worth $150 and plan to sell it in 250 days....

You own a dividend-paying stock currently worth $150 and plan to sell it in 250 days. In order to hedge against a possible price decline, you wish to take a short position in a forward contract that expires in 250 days. The risk-free rate is 5.25%. Over the next 250 days, the stock will pay dividends according to the following schedule: Days to next dividend Dividends per share 30 $1.20 120 $1.20 210 $1.20 Assume that the forward price of...

24. Suppose that you have a stock with an average (expected) return of 32% and a...

24. Suppose that you have a stock with an average (expected) return of 32% and a standard deviation of return of 16%. Please answer the following question (show your work in your uploaded document): What is the probability of getting a return less than zero? (Round to 4 decimals, like .0000 or 00.00%)

You have a portfolio worth $101,000 that has an expected return of 11.8 percent. The portfolio...

You have a portfolio worth $101,000 that has an expected return of 11.8 percent. The portfolio has $18,400 invested in Stock O, $26,200 invested in Stock P, with the remainder in Stock Q. The expected return on Stock O is 16.1 percent and the expected return on Stock P is 13 percent. What is the expected return on Stock Q?

You have a portfolio worth $86,000 that has an expected return of 11.2 percent. The portfolio...

You have a portfolio worth $86,000 that has an expected return of 11.2 percent. The portfolio has $17,800 invested in Stock O, $25,600 invested in Stock P, with the remainder in Stock Q. The expected return on Stock O is 15.5 percent and the expected return on Stock P is 12 percent. What is the expected return on Stock Q? Multiple Choice 8.92% 9.60% 10.27% 11.20% 12.97%