Question

The market portfolio has an expected return of 11.0 percent and a standard deviation of 21.0 percent. The risk-free rate is 4.0 percent. |

a. |
What is the expected return on a well-diversified portfolio with
a standard deviation of 8.0 percent? |

Expected return | % |

b. |
What is the standard deviation of a well-diversified portfolio
with an expected return of 19.0 percent? |

Standard deviation | % |

Answer #1

R_{m} = 11%

R_{f} = 4%

a.

For well diversified portfolio,

Correlation Coefficient = 1

Beta_{p} = 0.08/0.21 = 0.38

Using CAPM model,

Expected return of Portfolio = R_{f} +
Beta(R_{m} - R_{f})

Expected Return of Portfolio = 0.04 + 0.38(0.11 - 0.04)

Expected Return of Portfolio = 6.66%

b.

Expected Return = 0.19

Using CAPM model,

Expected return of Portfolio = R_{f} +
Beta(R_{m} - R_{f})

Beta = (0.19 - 0.04)/(0.11 - 0.04) = 2.14

For well diversified portfolio,

Correlation Coefficient = 1

Beta = Standard Deviation of Portfolio/Standard Deviation of market

Standard Deviation of Portfolio = 2.14 * 0.21

Standard Deviation of Portfolio = 44.94%

You have been provided the following data on the securities of
three firms, the market portfolio, and the risk-free asset:
a. Fill in the missing values in the table.
(Leave no cells blank - be certain to enter 0 wherever
required. Do not round intermediate calculations and round your
answers to 2 decimal places, e.g., 32.16.)
Security
Expected Return
Standard Deviation
Correlation*
Beta
Firm A
.115
.26
.91
Firm B
.135
.45
1.46
Firm C
.116
.71
.30
The...

You have been provided the following data on the securities of
three firms, the market portfolio, and the risk-free asset:
a. Fill in the missing values in the table.
(Leave no cells blank - be certain to enter 0 wherever
required. Do not round intermediate calculations and round your
answers to 2 decimal places, e.g., 32.16.)
Security
Expected Return
Standard Deviation
Correlation*
Beta
Firm A
.102
.33
.83
Firm B
.142
.52
1.38
Firm C
.162
.63
.37
The market...

There are two stocks in the market, Stock A and Stock B . The
price of Stock A today is $85. The price of Stock A next year will
be $74 if the economy is in a recession, $97 if the economy is
normal, and $107 if the economy is expanding. The probabilities of
recession, normal times, and expansion are .30, .50, and .20,
respectively. Stock A pays no dividends and has a correlation of
.80 with the market portfolio....

Suppose the risk-free
rate is 4.8 percent and the market portfolio has an expected return
of 11.5 percent. The market portfolio has a variance of .0442.
Portfolio Z has a correlation coefficient with the market
of .34 and a variance of .3345
According to the
capital asset pricing model, what is the expected return on
Portfolio Z? (Do not round intermediate calculations and
enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)

The expected return and standard deviation of a portfolio that
is 50 percent invested in 3 Doors, Inc., and 50 percent invested in
Down Co. are the following:
3 Doors, Inc.
Down Co.
Expected return, E(R)
19
%
14
%
Standard deviation, σ
62
24
What is the standard deviation if the correlation is +1? 0? −1?
(Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places. )

Suppose the expected returns and standard deviations of Stocks
A and B are E(RA) = .080,
E(RB) = .140, σA = .350, and
σB = .610.
a-1. Calculate the expected return of a portfolio
that is composed of 25 percent A and 75 percent B
when the correlation between the returns on A and
B is .40. (Do not round intermediate calculations.
Enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
Expected return 12.5 %
a-2....

Suppose the average return on Asset A is 6.5 percent and the
standard deviation is 8.5 percent, and the average return and
standard deviation on Asset B are 3.7 percent and 3 percent,
respectively. Further assume that the returns are normally
distributed. Use the NORMDIST function in Excel® to answer the
following questions.
a.
What is the probability that in any given year, the return on
Asset A will be greater than 10 percent? Less than 0 percent?
(Do not...

Suppose the average return on Asset A is 6.8 percent and the
standard deviation is 8 percent, and the average return and
standard deviation on Asset B are 3.9 percent and 3.3 percent,
respectively. Further assume that the returns are normally
distributed. Use the NORMDIST function in Excel® to answer the
following questions.
a. What is the probability that in any given year, the return on
Asset A will be greater than 10 percent? Less than 0 percent? (Do
not...

he expected return and standard deviation of a portfolio that is
30 percent invested in 3 Doors, Inc., and 70 percent invested in
Down Co. are the following: 3 Doors, Inc. Down Co. Expected return,
E(R) 18 % 14 % Standard deviation, σ 61 26 What is the standard
deviation if the correlation is +1? 0? −1? (Do not round
intermediate calculations. Enter your answer as a percent rounded
to 2 decimal places. )

You have been provided the following data about the securities
of three firms, the market portfolio, and the risk-free asset:
a.
Fill in the missing values in the table. (Leave no cells
blank - be certain to enter 0 wherever required. Do not round
intermediate calculations and round your answers to 2 decimal
places. (e.g., 32.16))
Security
Expected Return
Standard Deviation
Correlation*
Beta
Firm A
.100
.41
.86
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.150
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