Chapter_11_12_13_sol

Supposethatwal marthasanexpectedreturnof14

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Unformatted text preview: tions cost and can borrow and lend at the risk-free interest rate. Answer: B Explanation: A) B) C) D) Use the information for the question(s) below. Tomʹs portfolio consists solely of an investment in Merck stock. Merck has an expected return of 13% and a volatility of 25%. The market portfolio has an expected return of 12% and a volatility of 18%. The risk-free rate is 4%. Assume that the CAPM assumptions hold in the market. 22) Assuming that Tom wants to maintain the current volatility of his portfolio, then the maximum expected return that Tom could achieve by investing in the market portfolio and risk-free investment is closest to: A) 13% B) 15% C) 16% D) 12.% Answer: B Explanation: A) B) SD(RxCML)= xSD(RMkt) .25 = x(.18) => x = .25 / .18 = 1.39 E[RxCML] = rf + x(E[RMkt] - rf) E[RxCML] = .04 + 1.39(.12 - .04) = .1512 C) D) 23) Assuming that Tom wants to maintain the current expected return on his portfolio, then the amount that Tom should invest in the market portfolio to minimize his volatility is closest to: A) 100% B) 90% C) 125% D) 110% Answer: D Explanation: A) B) C) D) E[RxCML] = rf + x(E[RMkt] - rf) .13 = .04 + x(.12 - .04) x = .09 / .08 = 1.125 24) Assuming that Tom wants to maintain the current expected return on his portfolio, then the minimum volatility that Tom could achieve by investing in the market portfolio and risk-free investment is closest to: A) 20% B) 25% C) 22% D) 18% Answer: A Explanation: A) E[RxCML] = rf + x(E[RMkt] - rf) .13 = .04 + x(.12 - .04) x = .09 / .08 = 1.125 SD(RxCML) = xSD(RMkt) 1.125(.18) = .2025 B) C) D) 25) You currently own $100,000 worth of Wal-Mart stock. Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%. The market portfolio has an expected return of 12% and a volatility of 16%. The riskfree rate is 5%. Assuming the CAPM assumptions hold, what alternative investment has the lowest possible volatility while having the same expected return as Wal-Mart? What is the volatility of this portfolio? Answer...
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