1. Rates of Return 1) Arithmetic average return: rn = (ri+ r2+ r3...+ m) /n 2)...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. Rates of Return 1) Arithmetic average return: rn = (ri+ r2+ r3...+ m) /n 2) Geometric average return: g, = [(1 +ri)(1 + r2)(1 +r3 )...(1 + rn )]n -1 Example: Q1 Q2 25% Q3 Q4 Quarterly return 10% -20% 25% - Arithmetic: r4 = - Geometric: g4 = 3) Effective Annual Rate (EAR) = ( 1+ rate for period) Periods per year- 1 Example: quarterly return of 3% EAR = 2. Sharpe ratio = Portfolio risk premium/standard deviation Example: Security A (E(r) = 10%; o= 2.25%) vs. security B (E(r) = 12%; o = 5%) (Assume that the Treasury bill rate 6%) Sharpe ratioA= Sharpe ratiop= 3. Asset allocation between a risky portfolio and a risk-free asset 1) Construct the risky portfolio using stocks, bonds, etc. 2) Find the optimal risky portfolio P (CAL) 3) Determine wi for the risky portfolio and w2 (=1-w1) for the risk-free asset Example: 1) You invest your money in a risky portfolio P with an expected rate of return of 15% and a standard deviation of 25% and in a T-bill (risk-free asset) with a rate of return of 5%. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a combined portfolio C with an expected rate of return of 8%? 1 1. Rates of Return 1) Arithmetic average return: rn = (ri+ r2+ r3...+ m) /n 2) Geometric average return: g, = [(1 +ri)(1 + r2)(1 +r3 )...(1 + rn )]n -1 Example: Q1 Q2 25% Q3 Q4 Quarterly return 10% -20% 25% - Arithmetic: r4 = - Geometric: g4 = 3) Effective Annual Rate (EAR) = ( 1+ rate for period) Periods per year- 1 Example: quarterly return of 3% EAR = 2. Sharpe ratio = Portfolio risk premium/standard deviation Example: Security A (E(r) = 10%; o= 2.25%) vs. security B (E(r) = 12%; o = 5%) (Assume that the Treasury bill rate 6%) Sharpe ratioA= Sharpe ratiop= 3. Asset allocation between a risky portfolio and a risk-free asset 1) Construct the risky portfolio using stocks, bonds, etc. 2) Find the optimal risky portfolio P (CAL) 3) Determine wi for the risky portfolio and w2 (=1-w1) for the risk-free asset Example: 1) You invest your money in a risky portfolio P with an expected rate of return of 15% and a standard deviation of 25% and in a T-bill (risk-free asset) with a rate of return of 5%. What percentages of your money must be invested in the risky asset and the risk-free asset, respectively, to form a combined portfolio C with an expected rate of return of 8%? 1
Expert Answer:
Related Book For
Posted Date:
Students also viewed these accounting questions
-
The total risk of a security represents both unsystematic and systematic risk. The risk premium, for a stock, required by investors, therefore depends on the total risk. Discuss to what extent you...
-
Do you agree with this statement? All liabilities could be legally enforced in a court of law.
-
Do you agree with this statement: As price goes up, demand goes down? Explain your answer.
-
Lets assume the client in the fact pattern in this weeks discussion board did not want to purchase the mothers house (in other words, forget about only those facts) and now has been appointed as the...
-
Assuming that ex is differentiable on R, prove that is differentiable on [0, ). Is f differentiable at 0? f(x) ={1+el/x * #0 tel/x
-
Steam flowing through a long, thin-walled pipe maintains the pipe wall at a uniform temperature of 500 K. The pipe is covered with an insulation blanket comprised of two different materials, A and B....
-
Suppose that, as in the corn farm example, the farm has random production and the final spot price is governed by the same demand function. However, the crop of the farm is not perfectly correlated...
-
On January 1, 2011, LLB Industries borrowed $200,000 from trust Bank by issuing a two-year, 10% note, with interest payable quarterly. LLB entered into a two-year interest rate swap agreement on...
-
Required information Problem 6-2AA (Algo) Periodic: Alternative cost flows LO P3 [The following information applies to the questions displayed below] Warnerwoods Company uses a periodic inventory...
-
You are responsible for the audit of inventory for Honey Best Grocery Wholesales, Inc., a closely held grocery wholesaler that sells to independent grocery stores. Inventory is by far the largest...
-
Caleb Carr Berhad is a maufacturing company incorporated in Malaysia since 2015 has acquired 4,000,000 (80%) units of ordinary shares of Ninjitsu Sdn Bhd on 1 January 2019 with the following...
-
This is a two-part assignment. I want to expose you to another deduction that arises with micro and small businesses. That is Tax-in-Gross. If you say it carefully you may be able to visualize why...
-
1. What are the goals of the purchasing department? 2. What is the role of the purchasing department in the organization? 3. What is the purchasing policy in place for purchases? 4. Why didn't the...
-
Mr . Frimpong is a used clothing dealer in Accra. The business recorded a turnover of Ghs 7 5 , 0 0 0 in 2 0 1 7 . During the year, Mr . Frimpong had the following expenditures, receipts and...
-
Define and explain the four basic functions that constitute the management process? What is a partnership? List four advantages and disadvantages of operating a business as partnership? Give an...
-
It is December 3 1 , 2 0 2 3 . Lincoln has an asset ( Basis $ 1 0 , 0 0 0 ; FMV = $ 4 0 , 0 0 0 ) . The gainon the asset is subject to depreciation recapture and will result in $ 3 0 , 0 0 0 in...
-
Using demand and supply concepts, illustrate how the industry has changed in the past decades. Relate your summary of the bibliography and reliable data and evidence to support your demand and supply...
-
Fill in each blank so that the resulting statement is true. 83 + 103 = ______ .
-
Assume you invested in an asset for 2 years. The first year you earned a 15% return, and the second year you earned a negative 10% return. What was your annual geometric return?
-
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income...
-
The researchers at IAAI have forecasted positive trends for both job creation and consumer confidence. Which, if either, of these trends should have a positive affect on stock prices? Institutional...
-
Your boss gives you a sample of "gunk" and asks you to measure its viscosity. You do this in a cup and bob viscometer that has an outer (cup) diameter of 2 in., an inner (bob) diameter of $1.75...
-
The following data were obtained for a proprietary salad dressing tested at $22^{\circ} \mathrm{C}$ in a cup and bob viscometer (cup diameter $=4.2 \mathrm{~cm}$, bob diameter $=4.01 \mathrm{~cm}$,...
-
An inclined tube manometer with a reservoir is used to measure the pressure gradient in a large pipe carrying oil $(\mathrm{SG}=0.91)$ (see Figure $\mathrm{P} 4.5)$. The pipe is inclined at an angle...
Study smarter with the SolutionInn App