In the single-factor framework, the risk-free rate is rf= 0.01 = 1% and the expected market...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
In the single-factor framework, the risk-free rate is rf= 0.01 = 1% and the expected market risk premium is E(rM-rf)=E(RM) = 0.1 = 10%. Consider two strategies of investing $1,000,000. The first strategy, call it A, consists of investing the entire amount in a well-diversified portfolio P. The expected return of portfolio P is E(rp) = 0.1 = 10% and its beta is pp = 0.95. The second strategy, call it B, consists of investing $200,000 in the risk-free asset, investing $300,000 in an index fund that exactly replicates the market portfolio, and investing the remaining $500,000 in a well-diversified portfolio Q. The risk-adjusted performance (Jensen's alpha) of portfolio Q is ao = 0.02 = 2% and its beta is Bo= 1.215. What is the difference between the risk-adjusted performances of the two strategies, that is, what is the value of a4-ag? In the single-factor framework, the risk-free rate is rf= 0.01 = 1% and the expected market risk premium is E(rM-rf)=E(RM) = 0.1 = 10%. Consider two strategies of investing $1,000,000. The first strategy, call it A, consists of investing the entire amount in a well-diversified portfolio P. The expected return of portfolio P is E(rp) = 0.1 = 10% and its beta is pp = 0.95. The second strategy, call it B, consists of investing $200,000 in the risk-free asset, investing $300,000 in an index fund that exactly replicates the market portfolio, and investing the remaining $500,000 in a well-diversified portfolio Q. The risk-adjusted performance (Jensen's alpha) of portfolio Q is ao = 0.02 = 2% and its beta is Bo= 1.215. What is the difference between the risk-adjusted performances of the two strategies, that is, what is the value of a4-ag?
Expert Answer:
Answer rating: 100% (QA)
SOLUTION We can use the formula for Jensens alpha to calculate the riskadjusted performan... View the full answer
Related Book For
Understanding Basic Statistics
ISBN: 9781111827021
6th Edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase
Posted Date:
Students also viewed these finance questions
-
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 If your client is not knowledgeable about the market, you should ____ versus comparable portfolios. increase the frequency of trading increase the risk of the portfolio decrease your time with the...
-
The market risk premium is 6% and the risk free rate is 2%. An investor's existing portfolio of stocks has a beta of +1.3 and an expected return of +9.8%. The investor is considering adding a gold...
-
On March 1, 2014, Eire Co. paid $4,800 to Big North Insurance for a one-year insurance policy. Eire Co. has a December 31 fiscal year end and adjusts accounts annually. Complete the following for...
-
One alternative to using petroleum or natural gas as fuels is ethanol (C2H5OH), which is commonly produced from grain by fermentation. Consider a combustion process in which liquid ethanol is burned...
-
If VO= 4 v in the network shown, find VS. 8 kQ Vs V, = 4 V 4 kQ
-
During its first year of operations, Atlas Travel earned revenue of $400,000 on account. Industry experience suggests that Atlas Travels uncollectible accounts will amount to 2% of revenues. On...
-
1. Develop a graph or table that portrays the checking balances. What is the balance of a typical customer? Do many customers have more than $2,000 in their ac-counts? Does it appear that there is a...
-
Review and summarize "Causes of the 2008 Financial Crisis by Kimberly Amadeo. https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176
-
1. Assume a 30% tax rate, and the Totals per financial statements provided. Complete the following schedule as per Figure 16.4. Assume that the Totals per financial statements (second to bottom row)...
-
Problem 21 Given the following information Use Figure 25 Categories Values Sales 59100000 Cost of goods sold 29550000 Variable expenses 9850000 Fixed expenses 12000000 Inventory 6950000 Accounts...
-
(a) You want to estimate the effect of the logarithm of wages on the hours of work supplied by married women already in the workforce. The labor demand function is the second part of the system that...
-
How do technological advancements and digital innovations contribute to accelerated social change, and what are the implications for societal cohesion and individual identity in a rapidly evolving...
-
Gold Star Rice, Limited, of Thailand exports Thai rice throughout Asia. The company grows three varieties of rice-White, Fragrant, and Loonzain. Budgeted sales by product and in total for the coming...
-
First Fleet is a residential property development, which has reclaimed an area of swampland and disused industrial land. It has had the land rezoned and subdivided, and built prestigious waterfront...
-
Income Statement for a Manufacturing Company Two items are omitted from each of the following three lists of cost of goods sold data from a manufacturing company income statement. Determine the...
-
Please help, with encoded or typed solutions please. 1. BSBA Company produced joint products M, N and O from same raw materials with total joint costs P35,000. Other data are as follows: Quantity...
-
Given find the value of k. es 1 e kx dx = 1 4'
-
Study the binomial distribution table (Table 2 of the Appendix). Notice that the probability of success on a single trial p ranges from 0.01 to 0.95. Some binomial distribution tables stop at 0.50...
-
The following data are based on information taken from Daily Creel Summary, published by the Paiute Indian Nation, Pyramid Lake, Nevada. Movie stars and U.S. presidents have fished Pyramid Lake. It...
-
Let x be a random variable that represents the batting average of a professional baseball player. Let y be a random variable that represents the percentage of strikeouts of a professional baseball...
-
For a pure substance, if internal energy is considered to be the function of any two of the independent variables \(P, V\), and \(T\), then derive the following relations: (a) \(\left(\frac{\partial...
-
For a van der Waals gas, show that (a) \(d U=C_{V} d T+\frac{a}{V^{2}} d V\) (b) \(d S=C_{V} \frac{d T}{T}+\frac{R d V}{V-b}\)
-
What is Joule-Thomson coefficient? How does it relate to the heating or cooling effect of a gas passing through a porous plug?
Study smarter with the SolutionInn App