Question

We've spent all of this time to calculate an efficient or
optimal portfolio with an expected value of 10 percent, but the
expected value for asset ** a** is 10
percent.

Why not just invest in asset * a*?

Be sure to use your answers to questions about the efficient or
optimal portfolio and asset ** a** to answer
this question.

Answer #1

Investing in an efficient or optimal portfolio is better than only investing in one particular asset. As an optimal or efficient portfolio, considers the risk and return requirements of the investors. It generates the highest possible return for a given level of risk. It also considers weather an investors is risk averse or risk taking. It can help the investor to earn the return with the minimum level of risk taken.

Investing in a single asset is risky and exposes the investor to a lot of unwanted risk.

Although we get the same return but the risk return trade off is better in an efficient portfolio rather than investing in a single asset.

Calculate the missing
values for the following four efficient portfolios. The expected
return on the market is 7
percent, with a
standard deviation of 3 percent, and the risk-free rate is 2
percent.
Portfolio
Weight in Risk-free
Asset
Expected Portfolio
Return
Portfolio Standard
Deviation
A
15%
6.25%
B
30%
5.50%
C
45%
4.75%
D
60%
4.00%
E
75%
3.25%

You are constructing a portfolio of two assets, Asset A and
Asset B. The expected returns of the assets are 10 percent and 16
percent, respectively. The standard deviations of the assets are 27
percent and 35 percent, respectively. The correlation between the
two assets is .37 and the risk-free rate is 5.4 percent. What is
the optimal Sharpe ratio in a portfolio of the two assets? What is
the smallest expected loss for this portfolio over the coming year...

Suppose that the risk-free rate is 6 percent and the
expected return on the market portfolio is 15
percent. An investor with $1.5 million to invest wants to achieve a
25 percent return on a
portfolio combining the risk-free asset and the market portfolio.
Calculate how much this
investor would need to borrow at the risk-free rate in order to
establish this target expected
return. Provide your final answers up to two decimal points.

Suppose that the risk-free rate is 6 percent and the expected
return on the market portfolio is 15 percent. An investor with $1.5
million to invest wants to achieve a 25 percent return on a
portfolio combining the risk-free asset and the market portfolio.
Calculate how much this investor would need to borrow at the
risk-free rate in order to establish this target expected return.
Provide your final answers up to two decimal points.

Suppose that the risk-free rate is 6 percent and the expected
return on the market portfolio is 15 percent. An investor with $1.5
million to invest wants to achieve a 25 percent return on a
portfolio combining the risk-free asset and the market portfolio.
Calculate how much this investor would need to borrow at the
risk-free rate in order to establish this target expected return.
Provide your final answers up to two decimal points

Use the following information to calculate the expected return
and standard deviation of a portfolio that is 60 percent invested
in 3 Doors, Inc., and 40 percent invested in Down Co.: (Do
not round intermediate calculations. Enter your answers as a
percent rounded to 2 decimal places.)
3
Doors, Inc.
Down Co.
Expected return, E(R)
11
%
10
%
Standard deviation, σ
31
33
Correlation
.16

You have $110,000 to invest in a portfolio containing Stock X,
Stock Y, and a risk-free asset. You must invest all of your money.
Your goal is to create a portfolio that has an expected return of
10 percent and that has only 74 percent of the risk of the overall
market. If X has an expected return of 30 percent and a beta of
2.0, Y has an expected return of 20 percent and a beta of 1.2, and...

You have $110,000 to invest in a portfolio containing Stock X,
Stock Y, and a risk-free asset. You must invest all of your money.
Your goal is to create a portfolio that has an expected return of
10 percent and that has only 74 percent of the risk of the overall
market. If X has an expected return of 30 percent and a beta of
2.0, Y has an expected return of 20 percent and a beta of 1.2, and...

Use the following information to calculate 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.: (Do
not round intermediate calculations. Enter your answers as a
percent rounded to 2 decimal places. Omit the "%" sign in your
response.)
3 Doors, Inc.
Down Co.
Expected return,
E(R)
14
%
12
%
Standard deviation, σ
44
46
Correlation
.29
Expected return
%
Standard deviation...

Use the following information to calculate 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.: (Do
not round intermediate calculations. Enter your answers as a
percent rounded to 2 decimal places.)
3 Doors, Inc.
Down Co.
Expected return, E(R)
19
%
14
%
Standard deviation, σ
49
51
Correlation
.34

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