Question

Consider the following information:

Standard Deviation Beta

Security C 20% 1.25

Security K 30% 0.95

Which security should have the higher expected return? Explain in full. Please make sure to also explain which security has more total risk, and which security has more systematic risk within your answer.

Answer #1

**SECURITY "C" HAS HIGHER BETA (1.25) IN COMPARISON TO
SECURITY "K" (0..95), WHICH INDICATES THAT SECURITY "C" WILL CHANGE
BY 1.25% AND SECURITY "K" WILL CHANGE BY 0.95% WITH RESPECT TO 1%
CHANGE IN MARKET(INDEX)**

**SO SECURITY "C" WILL HAVE HIGHER
RETURN **

**THE STANDARD DEVIATION SHOWS WHO HAS MORE TOTAL RISK
.**

**SECURITY "K" HAS HIGHER SD THAN SECURITY
"C"**

**SO TOTAL RISK IS HIGHER FOR SECURITY "K"**

**SYSTEMATIC RISK IS DEFINED AS = (BETA) ^{2}(SD
MARKET)^{2}**

**NOW AS BETA IS HIGHER FOR SECURITY "C",**

**SECURITY "C" HAS HIGHER SYSTEMATIC RISK**

**Go through it, Any doubts, please feel free to ask, Give
positive feedback, Thank you**

Consider the following information:
Standard
Deviation
Beta
Security
T
20%
1.90
Security
K
30%
1.90
Which security has more total risk? (5
points)
Which security has more systematic risk? (5
points)
Which security should have the higher expected return?
(5 points)
What does the total risk consist of? What kind of risk is
eliminated with portfolio diversification? (5
points)

As an analyst you have gathered the following information:
Security
Expected Standard Deviation
Beta
Security 1
25%
1.50
Security 2
15%
1.40
Security 3
20%
1.60
(i) If
the expected market risk premium is 6% and the risk-free rate is
3%, what will be the required rate of return on each of the above
securities, and which of the security has the highest required
return?
(ii) With
respect to the capital asset pricing model, if expected return for
Security 2...

Standard deviation
Beta
Security
A
40%
0.5
Security
B
20%
1.5
Which security has a greater total risk? Explain. (2marks)
Which security has greater systematic risk? Explain.
(2marks)
Can diversification eliminate systematic risk? Explain.
(2marks)
The security market line (SML) is used to describe the
relationship between systematic risk and expected return. If an
investment has a positive NPV, would it plot above or below the
SML? Explain.

PLEASE SHOW YOUR WORK!
Consider the previous example with the following four
securities
Security Weight Beta
DCLK .133 2.685
KO . 2 0 .195
INTC .267 2.161
KEI .4 2.434
Which security has the highest systematic risk?
The lowest risk?
What is the portfolio beta?
Is the systematic risk of the portfolio more or less than the
market?

security
beta
Standard deviation
Expected return
S&P 500
1.0
20%
10%
Risk free security
0
0
4%
Stock d
( )
30%
13%
Stock e
0.8
15%
( )
Stock f
1.2
25%
( )
4) You form a complete portfolio by investing $8000 in S&P
500 and $2000 in the risk free security. Given the information
about S&P 500 and the risk free security on the table, figure
out expected return, standard deviation, and a beta for the
complete...

security
beta
Standard deviation
Expected return
S&P 500
1.0
20%
10%
Risk free security
0
0
4%
Stock d
( )
30%
13%
Stock e
0.8
15%
( )
Stock f
1.2
25%
( )
5) A complete portfolio of $1000 is composed of the risk free
security and a risky portfolio, P, constructed with 2 risky
securities, X and Y. The optimal weights of X and Y are 80% and 20%
respectively. Given the risk free rate of 4%....

As an analyst you have gathered the following information:
Security
Expected Annual Return
Expected Standard Deviation
Correlation between Security and the Market
Security 1
11%
25%
0.6
Security 2
11%
20%
0.7
Security 3
14%
20%
0.8
Market
10%
15%
1.0
(i). Compute the total variance on all
securities and identify the security which has the highest
total risk?
(ii). Compute the market risk for all
securities and identify the security which has the highest and
least market risk?
(iii)....

Suppose we have the following information:
Security Amount
invested Expected
Return Beta
Stock
A
$2,000
7%
0.70
Stock
B
4,000
10
0.85
Stock
C
6,000
13
1.10
Stock
D
8,000
16
1.30
What is the expected return on this portfolio?
What is the beta of this portfolio?
Does this portfolio have more or less systematic risk than an
average asset?

Q.8 Consider the following
assets:
asset
Expected return
Standard deviation
Beta
Risk-free asset
0.06
0
0
Market portfolio
0.22
0.20
1
Stock E
0.24
0.25
1.25
An investor wants to earn 24%, which one of the following
strategies is optimal? Explain why suboptimal strategies should not
be chosen.
Borrow at the risk-free rate and invest in stock E because the
risk –free asset will offset some of the risk of stock E.
Borrow at the risk-free rate and invest in...

Security A has a beta of 1.0 and an expected return of 12%.
Security B has a beta of 0.75 and an expected return of 11%. The
risk-free rate is 6%. Both these two securities are in the same
market. Explain the arbitrage opportunity that exists; explain how
an investor can take advantage of it. Give specific details about
how to form the portfolio, what to buy and what to sell (we assume
that the company-specific risk can be neglected)....

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