Question

Question 5 B An asset’s reward-to-risk ratio is defined as its risk premium divided by its...

Question 5 B

An asset’s reward-to-risk ratio is defined as its risk premium divided by its standard deviation. It is a useful statistic to summarize the asset’s risk-return trade-off. Consider the following information:

Stock A has a reward-to-risk ratio of 0.4 and stock B has a reward-to-risk ratio of 0.33. Stock A’s risk premium is 8%, stock B’s risk premium is 10% and the market risk premium is 7%. The correlation between stocks A and B is 0.6. Assume the CAPM holds.

A portfolio consisting of stocks A and B has 20% more systematic risk than the market.

Calculate the total risk of this portfolio.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Lets assume that the portfolio has a equal proportion of Stock A and Stock B. In other words the proportion of Stock A is 50% and Stock B is 50%.

Now Let us calculate the total risk of the Portfolio,

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The market risk premium for next period is 6.70% and the risk-free rate is 3.10%. Stock...
The market risk premium for next period is 6.70% and the risk-free rate is 3.10%. Stock Z has a beta of 0.74 and an expected return of 11.40%. What is the: a) Market's reward-to-risk ratio? b) Stock Z's reward-to-risk ratio
Consider the CAPM model. Stock A has a risk premium of 13%, and its standard deviation...
Consider the CAPM model. Stock A has a risk premium of 13%, and its standard deviation is 18%. The market index has a risk premium of 12%. The T-bill rate is 2%. The correlation between A and the market index is 0.1735. What is the standard deviation of the market index? A. 0.0255 B. 0.0212 C. 0.0288 D. 0.0831
There are two stocks in the market, Stock A and Stock B . The price of...
There are two stocks in the market, Stock A and Stock B . The price of Stock A today is $68. The price of Stock A next year will be $57 if the economy is in a recession, $80 if the economy is normal, and $90 if the economy is expanding. The probabilities of recession, normal times, and expansion are .13, .67, and .20, respectively. Stock A pays no dividends and has a correlation of .63 with the market portfolio....
A portfolio invests in a risk-free asset and the market portfolio has an expected return of...
A portfolio invests in a risk-free asset and the market portfolio has an expected return of 7% and a standard deviation of 10%. Suppose risk-free rate is 5%, and the standard deviation on the market portfolio is 22%. For simplicity, assume that correlation between risk-free asset and the market portfolio is zero and the risk-free asset has a zero standard deviation. According to the CAPM, which of the following statement is/are correct? a. This portfolio has invested roughly 54.55% in...
QUESTION 1 Part A: Which of the following statements is CORRECT? a. An investor can eliminate...
QUESTION 1 Part A: Which of the following statements is CORRECT? a. An investor can eliminate virtually all stand-alone risk if he or she holds a very large and well diversified portfolio of stocks. b. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio. c. Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount. d. An investor can eliminate virtually...
"Risk' can be best defined as on the of the followings:   a. Variability of returns and...
"Risk' can be best defined as on the of the followings:   a. Variability of returns and probability of financial loss b. Chance of financial loss   c. Variability of returns   d. Correlation of relationship among two variables Which of the following statement is NOT TRUE when we argue that the idea of riskless arbitrage is to accumulate the portfolio with following conditions : a. Requires no net wealth invested initially   b. Invest in the long-term securities only where risk will be...
a) Richard holds a stock portfolio of RM1300,000 consisting of RM30,000 invested in       each of...
a) Richard holds a stock portfolio of RM1300,000 consisting of RM30,000 invested in       each of 10 stocks. Each stock has a beta of 0.9. Therefore, the portfolio beta will       be 0.9 and it will be less risky than the market. Now suppose that Richard:       i)   sells one of the existing stocks, and replaces it with a stock with a beta of 2.0. What will             happen to the risk of the portfolio?                                                                                                                                                                                                                                                   ii)   sells...
CAPM, portfolio risk, and return Consider the following information for three stocks, Stocks A, B, and...
CAPM, portfolio risk, and return Consider the following information for three stocks, Stocks A, B, and C. The returns on the three stocks are positively correlated, but they are not perfectly correlated. (That is, each of the correlation coefficients is between 0 and 1.) Stock Expected Return Standard Deviation Beta A 8.32 % 16 % 0.8 B 10.40 16 1.3 C 12.06 16 1.7 Fund P has one-third of its funds invested in each of the three stocks. The risk-free...
Problem1 Are statements below true or false? Explain your answer. a) (0.5 point) Assume that CAPM...
Problem1 Are statements below true or false? Explain your answer. a) (0.5 point) Assume that CAPM holds. Given that stocks A and B, which are traded in the same market, have the same expected return, their betas must be the same. b) (0.5 point) Stocks A and B, which are traded in the same market, have the same beta. Given that Correlation(A,Market)>Correlation(B,Market), it must be the case that Standard deviation(A)<Standard deviation(B). c) (0.5 point) Assume that CAPM holds. In January...
There are two stocks in the market, stock A and stock B. The price of stock...
There are two stocks in the market, stock A and stock B. The price of stock A today is $80. The price of stock A next year will be $68 if the economy is in a recession, $88 if the economy is normal, and $100 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.2, 0.6, and 0.2, respectively. Stock A pays no dividends and has a beta of 0.83. Stock B has an expected...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT