Investments Assignment 3

Investments Assignment 3 - 13. Since CAPM is not valid, the...

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Bryan W. Redd Investments Assignment #3 Dr. Malakhov BKM Chapter 5 12. A) E(R) = (.17*.7)+(.07*.3) = 14% STDEV= 27*.7 = 18.9% B) Stock A = .7*.27 = 18.9% Stock B = .7*.33 = 23.1% Stock C = .7*.40 = 28% C) Sharpe Ratio Risky Portfolio: (.17-.07) / 27 = 37% Sharpe Ratio Complete Portfolio : (.14-.07) / 27 = 25.9% BKM Chapter 6 10. Stock Fund = (15 – 5.5) / 32 = .30 Bond Fund = (9 – 5.5) / 23 = .15 Best feasible CAL is .30 11. A) STDEV = 20.56% B) T-Bill = 11.92% Weight Stock = .64663*.88079 = 56.95% Weight Bond = . 353372*.88079 = 31.12% Weight 12. If only the risky portfolio was used with a required return of 12%. The weights would be 50% in each asset. Standard deviation is 21.06%. Therefore, if we maximize the Sharpe ratio, we can maximize our returns by taking on less risk. 19. Value Doubles .7 Half of Value .3 (.7*2) + (.3*.5) = 1.55 Rate of Return = 55% Variance: .7(.55-2)^2 = 1.472 .3(.55-.5)^2 = .00075 (1.472+. 00075) = 1.473 BKM Chapter 7 11. With a valid CAPM, it is possible if portfolio A has a lower Beta than the Market.
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Unformatted text preview: 13. Since CAPM is not valid, the situation is impossible. A larger Beta would mean a higher expected return. 18. If the Beta is really 1.0,you should be paying 10% more for the firm than what it is actually worth. A Premium of 10%. 20. A) You cant precisely tell without examining the alpha values of each investor to see which has the higher value. B) Adviser 1 Advisor 2 E[r] = 6+(1.5(14-6)) = 18% E[r] = 6+(1.0(14-6)) = 14% 19%-18% = Alpha 1% 16%-14% = Alpha 2% Advisor 2 is the superior stock selector. C) Adviser 1 Advisor 2 E[r] = 3+(1.5(15-6)) = 16.5% E[r] = 3+(1.0(15-6)) = 12% 19%-16.5% = Alpha 2.5% 16%-12% = Alpha 4% Advisor 2 because of its greater alpha value. Additional Problem #1 A) Beta = 1.86 B) Alpha is . 013 or 1.3% making the positive alpha indicates the additional return not measured by the market return. C) 100%-39.34% = 60.66%...
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This note was uploaded on 07/26/2011 for the course FIN 4133 taught by Professor Hearth during the Spring '11 term at Arkansas.

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Investments Assignment 3 - 13. Since CAPM is not valid, the...

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