Consider the single index model of investment returns in which for any security i: R =...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider the single index model of investment returns in which for any security i: R₁ = a₁ + R₁₂ R₁ + E₂ where E(e;)=0, E(ee;)=0 for ij, E(R)=0 and R, is the return on the market. (0) Assuming that this model applies, derive expressions for the mean investment return on security i, and the mean investment return on a portfolio P. containing n securities, with a proportion x, invested in security i. [3] (ii) Show that Cip=xCy, where Cup and C are the covariance of investment j=1 returns between security and portfolio P and securities i and respectively. [2] (iii) State a general expression for the variance of portfolio P in terms of the covariances Cij [1] (iv) Use your results from (ii) and (iii) to show that: dop 1 Bip = where Pip - dx, Op CIP and comment briefly on this result. [7] Consider the single index model of investment returns in which for any security i: R₁ = a₁ + R₁₂ R₁ + E₂ where E(e;)=0, E(ee;)=0 for ij, E(R)=0 and R, is the return on the market. (0) Assuming that this model applies, derive expressions for the mean investment return on security i, and the mean investment return on a portfolio P. containing n securities, with a proportion x, invested in security i. [3] (ii) Show that Cip=xCy, where Cup and C are the covariance of investment j=1 returns between security and portfolio P and securities i and respectively. [2] (iii) State a general expression for the variance of portfolio P in terms of the covariances Cij [1] (iv) Use your results from (ii) and (iii) to show that: dop 1 Bip = where Pip - dx, Op CIP and comment briefly on this result. [7]
Expert Answer:
Answer rating: 100% (QA)
i For any security i the mean investment return is ERi i The mean retu... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
Students also viewed these finance questions
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
Consider the linear demand curve shown in the following figure. There is a geometric way of calculating the price elasticity of demand for this curve at any arbitrary point (say point E). To do so,...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
1. Consider a local department store which only sells jeans (J) and sweaters (S). Jeans cost $20 and sweaters cost $30. For each of the examples below, graph the budget constraint our consumer faces,...
-
Refer to Exercise 11-34. Assume that the actual fixed overhead was $420,000. Budgeted fixed overhead was $405,000, based on practical capacity of 33,750 direct labor hours. Required: 1. Calculate the...
-
This chapter describes how the nature of the workforce is changing: the population is aging, the labor pool is shrinking, the workforce is becoming more diverse, the nature of work is changing, the...
-
Assume you work for an accounting firm and you are part of a team that does work for two clients that are competitors. Describe some ways in which ethical considerations might be an important part of...
-
The federal governments consolidated nancial statements contained the following excerpt from a note entitled Veterans Compensation and Pension: The Department of Veterans Affairs (VA) has a liability...
-
The big mall near Sally and Amy's city has extended their operating hours to accommodate the huge crowds expected for the After Thanksgiving Sale. In their eagerness to beat the crowd, Sally forgets...
-
While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE),...
-
4. React to this diagram using a concrete example. Higher GDP per capita Surplus Savings and Investment Domestic Production
-
State how your this example of spirituality's influence in client relationships resonates with you. Provide support for your perspective. State whether you are likely to use your client's strategy in...
-
Analyze the transformational effects of emerging technologies such as block chain, artificial intelligence (AI), machine learning (ML), and big data analytics on traditional banking structures,...
-
Assuming no friction, if a falling ball arrives at the floor with kinetic energy of 350 J, what is its elastic potential energy when the ball comes to a complete stop?
-
A firework explodes high in the air. The resulting sound spreads out uniformly in all directions. The sound intensity level is measured to be 63 dB at a distance of 120 m from the explosion. What is...
-
Most school districts provide a curriculum for their teachers. Describe the way in which a teacher's knowledge of his or her students such as assessment data, prior knowledge, etc., may affect the...
-
Lisa Lucky has won a big prize and will be given $20,000 every month commencing today for the next 5 years. If she invests the winnings at a rate of 9.60 percent per annum, what will be the: i. ii....
-
Prepare a stock card using the following information A company is registered for GST which it pays quarterly, assume GST was last paid on the 30th of June 2019. It uses weighted average cost...
-
Scott Butterfield is self-employed as a CPA. He uses the cash method of accounting, and his Social Security number is 644-47-7833. His principal business code is 541211. Scott's CPA practice is...
-
Mike sells his home to Jane on April 2, 2012. Jane pays the property taxes covering the full calendar year in October, which amount to $2,500. How much may Mike and Jane each deduct for property...
-
Steve Drake sells a rental house on January 1, 2012, and receives $130,000 cash and a note for $55,000 at 10 percent interest. The purchaser also assumes the mortgage on the property of $45,000....
-
Brown India Limited manufactures office tables. Normal capacity of the factory is 60,000 tables per annum. Following are the cost and inventory details for the year 200506. Required: Carry out the...
-
Usha Corporation Ltd. sought the advice of an investment advisor for deployment of surplus funds of around Rs. 45 lakh in the stock market. The advisor advised to invest in Bhonsle India Ltd. and...
-
Ram Lakhan Company Ltd. produces one unit of product B by using one unit of raw material A. During 200506 A costed the company 4,200. Conversion cost was 850. As on 31st March 2006, being the...
Study smarter with the SolutionInn App