Your uncle, Larson E. Whipsnade, has asked you for some financial advice. His retirement savings are...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Your uncle, Larson E. Whipsnade, has asked you for some financial advice. His retirement savings are currently invested as follows: $30,000 in the risk-free asset and $70,000 in GM stock. He wants to know if this is a sensible portfolio. You decide to analyze it based on the CAPM model. You look in a Beta Book and find that GM stock has a Beta 1.20. The Standard deviation of GM is 48.2% a.) If rf is 7% and the market risk premium (rm - re) is 8%, what is the expected return on his portfolio? b.) Suggest a different portfolio for your uncle that has the same expected return as the old portfolio but is efficient (i.e., has the smallest variance possible for that level of expected return). Hint: an efficient portfolio is one which combines only two assets: the Rf asset (Rf-7%) and the Market asset (Rm=?). what percentage of assets would be invested in the market asset and which percentage would be in the Rf asset? c.) If the market return has a standard deviation of 22%, compute the standard deviation of his current portfolio and compare it to the standard deviation of the portfolio you are suggesting in part (b). Your uncle, Larson E. Whipsnade, has asked you for some financial advice. His retirement savings are currently invested as follows: $30,000 in the risk-free asset and $70,000 in GM stock. He wants to know if this is a sensible portfolio. You decide to analyze it based on the CAPM model. You look in a Beta Book and find that GM stock has a Beta 1.20. The Standard deviation of GM is 48.2% a.) If rf is 7% and the market risk premium (rm - re) is 8%, what is the expected return on his portfolio? b.) Suggest a different portfolio for your uncle that has the same expected return as the old portfolio but is efficient (i.e., has the smallest variance possible for that level of expected return). Hint: an efficient portfolio is one which combines only two assets: the Rf asset (Rf-7%) and the Market asset (Rm=?). what percentage of assets would be invested in the market asset and which percentage would be in the Rf asset? c.) If the market return has a standard deviation of 22%, compute the standard deviation of his current portfolio and compare it to the standard deviation of the portfolio you are suggesting in part (b).
Expert Answer:
Answer rating: 100% (QA)
a To calculate the expected return on the portfolio using the CAPM model we use the formula Expected ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Describe the major business processes. Show one of the business process/activities of an Omani company. 1. Topic selection (as per course instructor). 2. Topic research (discussion with course...
-
This assignment requires you to complete the 2022 tax reporting for a fictional woman named Anna Smith. Question 1 T1 - step 4 - line 66 This is Anna's taxable income Answer: Question 2 T1 - step...
-
1. If your job were to allocated one large amount of money to combat the illegal drug problem in America, (assume strong addictive characteristics to these drugs). Would you attack the supply or...
-
The balances for the accounts that follow appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet. Indicate whether each account would flow into the income statement, statement...
-
What assumption does the computer make to determine the value of an inventory item based on the last-in, first-out method?
-
This appeal involves the validity of a will executed in contravention of an earlier contract to make mutual wills. A husband and wife signed a contract to make mutual wills and then executed those...
-
The adjusted trial balance for Frinzi Company is given in E3-13. In E3-13, the trial balances before and after adjustment for Frinzi Company at the end of its fiscal year are presented below....
-
Consider that the current world price for copper ore it's $3.90 per pound. Suppose that domestic market for copper ore in Chile is described by the following demand and supply equation respectively P...
-
Q4. (a) Oil with density 870 kg/m3 is conveyed through a pipe at a discharge of 0.11 m3 /s. At a certain location the pipe bends downwards in the vertical plane through an angle of 30 degrees. The...
-
On the first day of the fiscal year, Rainbow Company issues a $692200, 6%, 5-year bond that pays semiannual interest for a cash price of 95% of the face value of the bond. What is the discount amount?
-
1. Suppose that a BMW costs 45,000 in Germany and that the current USD/EUR exchange rate is .80. a) Calculate the dollar price of the BMW. b) Now suppose the euro appreciates relative to the dollar...
-
Under a divorce agreement executed in 2017 Roberta receives $2,000 in monthly alimony from her former husband and $3,000 in child support payments. How much of her annual payments received in 2023...
-
This assignment requires you to complete a number of typical tasks that you would normally use JavaScript to solve. Each task is typical situation that requires you to apply specific JavaScript...
-
JCR Co. reported $770,000 in net income and its weighted average shares outstanding for the year is 100,000 shares. In prior years it sold $1,000,000 of 8% long-term convertible bonds at par which...
-
(a) An inviscid incompressible fluid moves in a steady irrotational manner. Define the complex potential w(2)), z = x+ iy, for the flow. Explain how the complex velocity and the stagnation points are...
-
The Ferris wheel in the figure has a radius of 68 feet. The clearance between the wheel and the ground is 14 feet. The rectangular coordinate system shown has its origin on the ground directly below...
-
Tiana Company reported total assets of $1,400,000 and noncurrent assets of $480,000. The company also reported a current ratio of 3.5. What amount of current liabilities did the company report?
-
Company A purchased a certain number of Company B's outstanding voting shares at $20 per share as a long-term investment. Company B had outstanding 20,000 shares of $10 par value stock. Complete the...
-
Frances Sabatier asked a local bank for a $50,000 loan to expand her small company. The bank asked Frances to submit a financial statement of the business to supplement the loan application. Frances...
-
A probability experiment consists of rolling a single fair die. (a) Identify the outcomes of the probability experiment. (b) Determine the sample space. (c) Define the event E = roll an even number....
-
A pair of fair dice is rolled. Fair die are die where each outcome is equally likely. (a) Compute the probability of rolling a seven. (b) Compute the probability of rolling snake eyes; that is,...
-
Our number system consists of the digits 0, 1, 2, 3, 4, 5, 6, 7, 8, and 9. Because we do not write numbers such as 12 as 012, the first significant digit in any number must be 1, 2, 3, 4, 5, 6, 7, 8,...
Study smarter with the SolutionInn App