Question

- 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). Which security has the
*least* amount of market risk?

Answer #1

1) calculating variance of all securities

Security 1 =.25^2 = .0625

Security 2 = .20^2 =.04

Security 3 = .20^2 = .04

Security 1 has the highest variance compare to other securities so security 1 has the highest total risk

2) Market risk of the securities

Beta = (correlation*Security standard deviation)/ Market return

Security 1= (.6)(.25)/.10 =1.5

Security 2 =(.7)(.20)/.10 =1.4

Security 3 = (.8)(.20)/.10 =1.6

Here, the security 3 has highest market beta 1.6. So, security 3 has highest market risk

3) Security 2 has the lowest amount of Market risk. It has the lowest bea 1.4 So it the lowest market risk

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...

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%....

Question 2
Correlation Matrix
Securities
Expected
Return
Standard Deviation
Google
Microsoft
Apple
Market Portfolio
Google
19.2%
36%
1.0
0.7
0.6
0.5
Microsoft
21.9%
35%
1.0
0.5
0.6
Apple
12.0%
25%
1.0
0.4
Market
Portfolio
12.0%
10%
1.0
The risk-free interest rate is 3%.
Given the correlation matrix, what is the covariance between
Google and the Market?
Given the correlation matrix, what is the beta of Microsoft?
Show that Microsoft is priced according to the CAPM.
What is the expected return...

Question 2
Correlation Matrix
Securities
Expected
Return
E(Ri)
Standard Deviation
σi
Google
Microsoft
Apple
Market Portfolio
Google
19.2%
36%
1.0
0.7
0.6
0.5
Microsoft
21.9%
35%
1.0
0.5
0.6
Apple
12.0%
25%
1.0
0.4
Market
Portfolio
12.0%
10%
1.0
The risk-free interest rate is 3%.
Given the correlation matrix, what is the covariance between
Google and the Market?
Given the correlation matrix, what is the beta of Microsoft?
Show that Microsoft is priced according to the CAPM.
What is the...

Consider the
following 2 securities with:
Expected rate of return on security 1 = 15%
Expected rate of return on security 2 = 5%
Variance of security 1 = 225
Variance of security 2 = 100
Assume the coefficients of correlation
are:
-1.0, -0.75, -0.5, 0, 0.5, 0.75,
1.0
You have to select a security for investment which one will you
select?
If you have to obtain the Global minimum variance portfolio for
each coefficient of correlation, what will be...

If you have one security with an expected return of 7% and a
standard deviation of 2% and a second security with an expected
return of 13% and a standard deviation of 2.4%, what would be the
standard deviation of a portfolio that consists of 30% of the first
security and 70% of this second security if the correlation
coefficient between the two securities is -.30?

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)....

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 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)....

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.

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