Question

In: Finance

1A) Suppose that your friend, Angela, holds a single stock, Early Riser Bank (ERB), which she...

1A) Suppose that your friend, Angela, holds a single stock, Early Riser Bank (ERB), which she believes faces little risk. Despite the fact that you agree with Angela on the riskiness of the firm, you set out to show her that her risk would be even lower if she was more diversified. As a demonstration exercise, you find the following returns data for Late Riser Bank (LRB). Using the standard deviation of returns, by how much would Angela's risk have been reduced if she had held a 60/40 portfolio ( 60% in ERB and the remainder in LRB)?  

   Year               ERB        LRB  

  •                 2008             40.00% 40.00%
  •                 2009            -10.00%        15.00%
  •                 2010             35.00%        -5.00%
  •                 2011             -5.00%       -10.00%
  •                 2012             15.00%        35.00%

Average return = 15.00%        15.00%

Standard deviation = 22.64%        22.64%

Select one:

- 3.46%

- 4.03

- 3.84%

- 3.29%

1B) Blackrock is a $3 billion hedge fund that contains the stocks listed below. Assume that the required rate of return on the market is 11 percent and the risk-free rate is 5 percent. What rate of return should investors expect (and require) on this fund?

                  Stock        Amount    Beta

                     A         $1,075,000 1.20

                     B            675,000 0.50

                     C            750,000 1.40

                     D            500,000 0.75

  $3,000,000

Select one:

- 11.67%

- 10.56%

- 11.11%

- 10.83%

Solutions

Expert Solution

jeff jeffy answered 1 year ago
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