Question

The standard deviation of Asset A returns is 36%, while the standard deviation of Asset M returns is 24%. The correlation between Asset A and Asset M returns is 0.4.

(a) The average of Asset A and Asset M’s standard deviations is (36+24)/2 = 30%. Consider a portfolio, P, with 50% of funds in Asset A and 50% of funds in Asset M. Will the standard deviation of portfolio P’s returns be greater than, equal to, or less than 30%? Explain this answer intuitively.

(b) What, specifically, will be the standard deviation of portfolio P returns?

(c) Asset M is in fact the “market” portfolio. What is the Beta coefficient for Asset M? For Asset A? For Portfolio P?

(d) Assume that the CAPM holds, that the risk-free interest rate is 1% and that the expected return on the market is 7.5%. What is the expected return on Asset A? On portfolio P?

Answer #1

The standard deviation of a stock’s returns is 24% and the
correlation of its returns with the returns of the market portfolio
is 0.4. The standard deviation of the returns of the market
portfolio is 16%. The expected return of the market portfolio is
11% and the risk-free rate of return is 3%. The stock is currently
priced at $45 and you expect the price to be $50 in one year. The
stock is not expected to pay any dividends...

Asset 1 has a standard deviation of returns equal to 4% per
year, and an expected return of 2.5% per year. Asset 2 has a
standard deviation of returns equal to 25% per year, and an
expected return of 6% per year. The correlation between the two
assets is 0.2. What is the standard deviation of a portfolio that
has 50% in asset 1 and 50% in asset 2?.

Asset
E(R)
Std. deviation
A
30%
50%
Market (M)
20%
20%
Above is the expected return and standard deviation of a stock A
and the market portfolio. The correlation coefficient between A and
the market portfolio (M) is 0.6. The risk-free rate is 4%
Based on CAPM, stock A is _____________ because it offers an
alpha of ________.
A.
underpriced;10.0%
B.
overpriced; 2.0%
C.
underpriced; 2.0%
D.
underpriced; 4.0%
E.
overpriced; -4.0%

Consider the following statistics of
the returns of Stock A, Stock B and the market (m):
sA =
0.20 corrA,m = 0.4
sB =
0.30 corrB,m = 0.7
sm = 0.15
E(rm) = 0.10
Suppose further that the risk-free
rate is 5%.
(a) According to the Capital Asset Pricing Model, what
should be the expected return of Stock A and of
Stock B? [Hint: This is an open-book
exam.]
(b) Suppose that the correlation between the...

Suppose that the market portfolio has an expected return of 10%,
and a standard deviation of returns of 20%. The risk-free rate is
5%.
b) Suppose that stock A has a beta of 0.5 and an expected return
of 3%. We would like to evaluate, according to the CAPM, whether
this stock is overpriced or underpriced. First, construct a
tracking portfolio, made using weight K on the market portfolio and
1 − K on the risk-free rate, which has the...

Which of the following will be true about the return and
standard deviation of a portfolio?
A. The return of a portfolio will be the weighted average of the
returns in the portfolio, but the standard deviation will be less
than the weighted average of the standard deviations in the
portfolio.
B. The return and standard deviation of a portfolio will be the
weighted average of the returns and standard deviations in the
portfolio.
C. The return and standard deviation...

Asset
E(R)
Std. deviation
A
17%
50%
Market (M)
10%
20%
Above is the expected return and standard deviation of a stock A
and the market portfolio. The correlation coefficient between A and
the market portfolio (M) is 0.5. The risk-free rate is 4%
Based on CAPM, stock A is ____________ because it offers an
alpha of ____________.
A.
underpriced; 7%
B.
underpriced; 5.5%
C.
overpriced; 5.5%
D.
underpriced; 0.5%
E.
overpriced; -0.5%

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...

Given the following
information:
Expected return on Stock A
.15 (15%)
Standard deviation of return
0.3
Expected return on Stock B
.18 (18%)
Standard deviation of return
0.4
Correlation coefficient of the returns
on Stock A and Stock B
0.75
a. What are the expected returns and
standard deviations of the following
portfolios?
1. 100 percent of funds invested in
Stock A
2. 100 percent of funds invested in Stock B
3. 50 percent of funds invested in each stock?

There are 2 assets. Asset 1: Expected return 7.5%, standard
deviation 9% Asset 2: Expected return 11%, standard deviation 12%.
You are not sure about the correlation between 2 assets. You hold
30% of your portfolio in asset 1 and 70% in asset 2.
What is the highest possible variance of your portfolio?
Hint 1: Think how the portfolio variance depends on the
correlation between 2 assets.
Hint 2: Think which values the correlation between Asset 1 and
Asset 2...

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