1) Three-Asset Portfolio Calculate the expected return and standard deviation of the three-asset portfolio shown in...

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1) Three-Asset Portfolio Calculate the expected return and standard deviation of the three-asset portfolio shown in the following figure: Amount invested Expected return Standard deviation Correlation Norway/ Weston Correlation Norway/ Texas Correlation Weston/ Texas 0,30 0,10 0,5 Norway 40,000 11% 15% Weston 25,000 25% 20% Texas 35,000 30% 25% 2) The variance of an equally-weighted portfolio Consider two equally-weighted portfolios, A and B, in which the average asset variance equals 0.15 and the average covariance equals 0.09. Portfolio A comprises three assets, and Portfolio B comprises 100 assets. Calculate the variance of each portfolio. 3) Expected return from the CAL Your firm manages a portfolio with an expected return equal to 12% and standard deviation equal to 24%. The risk-free rate equals 6%. One of your clients desires a portfolio standard deviation equal to 12%. Use the CAL to calculate the highest expected return for your client. 4) Standard deviation from the CAL The CAL can be used to calculate the standard deviation associated with a target expected return. For example, imagine that your client has a target expected return equal to 9%. Use the CAL to calculate the standard deviation associated with her optimal investment combination. 5) Appropriate allocation to the risk-free asset and to the optimal risky portfolio Your client has a target standard deviation equal to 12%. Use the data above to determine the appropriate allocation to Treasury bills and to the optimal risky portfolio that will satisfy your client's risk tolerance. 6) Calculate the expected return on a stock with the CPAM Assume you are assigned the task of evaluating the stock of Tallar RE, Inc. To evaluate the stock, you calculate its required return using the CAPM. The following information is available: Calculate and interpret the CAPM expected return for Tallar RE. 7) Calculate and interpret the beta of a stock Assume the correlation of returns between Tallar RE Co. and the market portfolio equals 0.80, the standard deviation of Tallar RE Co. equals 0.60, and the standard deviation for the market portfolio equals 0.30. Calculate the beta for Tallar RE Co. 8) Using the SML A stock has a beta of 0.75 and an expected return of 13%. The risk-free rate is 4%. Calculate the market risk premium and the expected return on the market portfolio. 9) Using the beta formula A stock has a beta of 2.0. The correlation of the stock's returns with the market is 0.5 and the variance of the returns on the market portfolio is 0.04. Calculate the variance of returns on the stock. Expected market risk premium 5% Risk-free rate 4% Tallar RE beta 1.5 10) Using the Sharpe ratio Given a Sharpe ratio for the market portfolio of 0.40, calculate the expected return on a stock with a standard deviation of returns of 0.50 and a correlation with the market portfolio returns of 0.6. The risk-free rate is 5% and the standard deviation of the market portfolio returns is 0.25. 11) The following data has been collected to appraise the following four funds: Return Beta Standard deviation Tracking error* Fund A 8.25% 0.91 3.24% 0.43% Fund B 7.21% 0.84 3.88% 0.62% Fund C 9.44% 1.02 3.66% 0.33% Fund D 10.12% 1.34 3.28% 1.09% Market Index 8.60% 1.00 3.55% The risk-free rate of return for the relevant period was 4%. Calculate and rank the funds using the following methods: A. Jensen's alpha B. Treynor measure C. Sharpe ratio D. M2 E. Information ratio Compare and contrast the methods and explain why the ranking differs between methods. 1) Three-Asset Portfolio Calculate the expected return and standard deviation of the three-asset portfolio shown in the following figure: Amount invested Expected return Standard deviation Correlation Norway/ Weston Correlation Norway/ Texas Correlation Weston/ Texas 0,30 0,10 0,5 Norway 40,000 11% 15% Weston 25,000 25% 20% Texas 35,000 30% 25% 2) The variance of an equally-weighted portfolio Consider two equally-weighted portfolios, A and B, in which the average asset variance equals 0.15 and the average covariance equals 0.09. Portfolio A comprises three assets, and Portfolio B comprises 100 assets. Calculate the variance of each portfolio. 3) Expected return from the CAL Your firm manages a portfolio with an expected return equal to 12% and standard deviation equal to 24%. The risk-free rate equals 6%. One of your clients desires a portfolio standard deviation equal to 12%. Use the CAL to calculate the highest expected return for your client. 4) Standard deviation from the CAL The CAL can be used to calculate the standard deviation associated with a target expected return. For example, imagine that your client has a target expected return equal to 9%. Use the CAL to calculate the standard deviation associated with her optimal investment combination. 5) Appropriate allocation to the risk-free asset and to the optimal risky portfolio Your client has a target standard deviation equal to 12%. Use the data above to determine the appropriate allocation to Treasury bills and to the optimal risky portfolio that will satisfy your client's risk tolerance. 6) Calculate the expected return on a stock with the CPAM Assume you are assigned the task of evaluating the stock of Tallar RE, Inc. To evaluate the stock, you calculate its required return using the CAPM. The following information is available: Calculate and interpret the CAPM expected return for Tallar RE. 7) Calculate and interpret the beta of a stock Assume the correlation of returns between Tallar RE Co. and the market portfolio equals 0.80, the standard deviation of Tallar RE Co. equals 0.60, and the standard deviation for the market portfolio equals 0.30. Calculate the beta for Tallar RE Co. 8) Using the SML A stock has a beta of 0.75 and an expected return of 13%. The risk-free rate is 4%. Calculate the market risk premium and the expected return on the market portfolio. 9) Using the beta formula A stock has a beta of 2.0. The correlation of the stock's returns with the market is 0.5 and the variance of the returns on the market portfolio is 0.04. Calculate the variance of returns on the stock. Expected market risk premium 5% Risk-free rate 4% Tallar RE beta 1.5 10) Using the Sharpe ratio Given a Sharpe ratio for the market portfolio of 0.40, calculate the expected return on a stock with a standard deviation of returns of 0.50 and a correlation with the market portfolio returns of 0.6. The risk-free rate is 5% and the standard deviation of the market portfolio returns is 0.25. 11) The following data has been collected to appraise the following four funds: Return Beta Standard deviation Tracking error* Fund A 8.25% 0.91 3.24% 0.43% Fund B 7.21% 0.84 3.88% 0.62% Fund C 9.44% 1.02 3.66% 0.33% Fund D 10.12% 1.34 3.28% 1.09% Market Index 8.60% 1.00 3.55% The risk-free rate of return for the relevant period was 4%. Calculate and rank the funds using the following methods: A. Jensen's alpha B. Treynor measure C. Sharpe ratio D. M2 E. Information ratio Compare and contrast the methods and explain why the ranking differs between methods.

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1 ThreeAsset Portfolio Expected return of the portfolio Weight Expected return 40000100000 11 25000100000 20 35000100000 25 155 Standard deviation of the portfolio Weight2 Variance WeightWeightCovaria... View the full answer