(25pts) Consider two risky assets A and B and your investment time horizon is 1 year....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
(25pts) Consider two risky assets A and B and your investment time horizon is 1 year. Your forecasts for their annual expected return and standard deviation are presented in the following table. You estimate their correlation would be 0.5. The risk-free rate is 2% per year and the market risk premium is 6% per year. Asset A B Expected Return 10% 20% Standard Deviation 12% 30% (1) (8pts) Find out the portfolio formed by A and B that has the highest Sharpe ratio. You need to give the weights of each asset and the value of the portfolio's expected return and standard deviation. (2) (5pts) Suppose your risk-aversion index is 5. How do you allocate your investment among the risk-free asset, A and B? (3) (5pts) Find out BA and BB. (4) (7pts) Suppose you invest $1 million in the portfolio that you found in (2). How do you hedge the stock market risk using S&P500 index futures contracts that mature in one year? Specify which position you will take and the number of futures contracts (round to the nearest integer). The current 1-year futures price for S&P500 is 2500 and the value of a single futures contract is 250 times the futures price. (25pts) Consider two risky assets A and B and your investment time horizon is 1 year. Your forecasts for their annual expected return and standard deviation are presented in the following table. You estimate their correlation would be 0.5. The risk-free rate is 2% per year and the market risk premium is 6% per year. Asset A B Expected Return 10% 20% Standard Deviation 12% 30% (1) (8pts) Find out the portfolio formed by A and B that has the highest Sharpe ratio. You need to give the weights of each asset and the value of the portfolio's expected return and standard deviation. (2) (5pts) Suppose your risk-aversion index is 5. How do you allocate your investment among the risk-free asset, A and B? (3) (5pts) Find out BA and BB. (4) (7pts) Suppose you invest $1 million in the portfolio that you found in (2). How do you hedge the stock market risk using S&P500 index futures contracts that mature in one year? Specify which position you will take and the number of futures contracts (round to the nearest integer). The current 1-year futures price for S&P500 is 2500 and the value of a single futures contract is 250 times the futures price.
Expert Answer:
Answer rating: 100% (QA)
Answer 1 8pts Find out the portfolio formed by A and B that has the highest Sharpe ratio You need to give the weights of each asset and the value of the portfolios expected return and standard deviati... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
A manufacturing process is considered to be "in control" if the long-run mean weight of components produced is 0.20 kilograms, even though individual components may vary from this mean. Here are...
-
By looking at the region in Figure 9 first vertically and then horizontally, conclude that And use this fact to calculate: (a) (b) xÌ, the horizontal coordinate of the centroid of the region?...
-
Company is expected to have extraordinary growth of 20% for four years, after which it will face more competition and slip into a constant growth rate of 5%. Its required rate of return is 10%....
-
In 1976, Mohamed EI-Iladad earned an undergraduate accounting degree in his native Egypt. Before he began his accounting career, El-Hadad completed his compulsory service in the Egyptian military...
-
1. Evaluate Volkswagens strategies with regard to marketing. 2. What choices did Volkswagen have in market entry strategy, and did it make a wise decision? 3. Should Volkswagen make a strong effort...
-
A stream of ethylene gas at 250oC and 3.800 kPa expands isentropically in a turbine to 120 kPa. Determine the temperature of the expanded gas and the work produced if the properties of ethylene are...
-
What is a shape function?
-
Jack and Maggie Turton bought a house in Jefferson County, Idaho, located directly across the street from a gravel pit. A few years later, the county converted the pit to a landfill. The landfill...
-
Use Spyder for below task Start with your program from previous task: 1. Modify the theme of your program. 2. Modify the program to add styles as follows: 3 different styles for labels. Do not just...
-
Write a program that produces calendars as output. Your program should have a method that outputs a single months calendar like the one below, given parameters to specify how many days are in the...
-
The equity sections for Atticus Group at the beginning of the year (January 1) and end of the year (December 31) follow. Stockholders Equity (January 1) Common stock$4 par value, 100,000 shares...
-
IN 2022 The Covid-19 pandemic, and the ensuing commodity price disruptions and shortages, have forever altered the world of procurement. In 2022, many businesses will continue to grapple with heavily...
-
All products (dresses) are produced by our manufacturer 'G Mega' which is in Taipei city, Taiwan Once products are done, our carrier (Fedex Small Business) is able to pick up shipments through sea...
-
1. Pickled Vegetables sold in Canadian stores contain the following ingredients; vinegar, spices, cauliflower, carrots, onion, banana peppers, and water. All ingredients except the banana peppers are...
-
Before he took the issue to the Management Committee, Dr. Davis gathered some data with the help of the clinic office staff: The urgent care clinic is open 10:00AM until 10:00PM Monday through Friday...
-
What are the rates of readmission among the physicians in question from '94 - '98 and the readmission rate from '99 - '03? Show your work. b) What is the marginal cost-effectiveness ratio (expressed...
-
How do integrative negotiation techniques, such as principled negotiation or interest-based bargaining, foster mutually beneficial outcomes in complex conflict scenarios?
-
Sheldon and Leonard had a million-dollar idea. In order to make it happen, they have to do special research first. Only Kripke can help them in this matter. But Kripke is known to be the first-class...
-
a. What would you change in the computation of a two-sided 95% prediction interval to find a two-sided 99% prediction interval instead? b. What would you change in the computation of a two-sided 95%...
-
What is the difference between discrete and continuous quantitative variables?
-
Repeat the previous problem, but now assume that 85% are in favor in the population. Is the uncertainty larger or smaller than when 50% was assumed? Why?
-
Calculate the correlations among all numeric variables in Exercise 9.1 using SPSS, or R. (In R read in the data as a data.frame (e.g., theData) and then use (cor(theData). You dont need to attach...
-
Using one of the online calculators, how large a correlation would you need for the relationships shown in Exercise 9.2 to be significant? (This will involve a bit of trial and error.) Calculate the...
-
What are the strongest single predictors of infant mortality in Exercise 9.2? Exercise 9.2 Calculate the correlations among all numeric variables in Exercise 9.1 using SPSS, or R. (In R read in the...
Study smarter with the SolutionInn App