Consider the following information about the various states of economy and the returns of various investment...
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Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession. Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation. Covariance with MP Correlation with Market Index. Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive) Probability 0.2 0.1 0.3 0.3 0.1 % Return on T-Bills, Stocks and Market Index T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 Pay- Rubber- up made 28 10 14.7 0 -10 -20 -10 a) Plot the Security Market Line (SML) b) Superimpose the CAPM's required return on the SML c) Indicate which investments will plot on, above and below the SML? 7 45 30 Market Index -13 1 15 29 Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items. Each line item is worth 2 marks Question 2 43 b) Compute the expected return of the portfolio thus formed c) Compute the portfolio's beta. Is the portfolio aggressive or defensive? d) If an investment's expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph Question 3 From the information generated in the previous two questions; a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50- 50 investment allocation in each investment alternative Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession. Below Average Average Above Average Boom Mean Standard Deviation Coefficient of Variation. Covariance with MP Correlation with Market Index. Beta CAPM Req. Return Valuation (Overvalued/Undervalued/Fairly Valued) Nature of stock (Aggressive/Defensive) Probability 0.2 0.1 0.3 0.3 0.1 % Return on T-Bills, Stocks and Market Index T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 Pay- Rubber- up made 28 10 14.7 0 -10 -20 -10 a) Plot the Security Market Line (SML) b) Superimpose the CAPM's required return on the SML c) Indicate which investments will plot on, above and below the SML? 7 45 30 Market Index -13 1 15 29 Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items. Each line item is worth 2 marks Question 2 43 b) Compute the expected return of the portfolio thus formed c) Compute the portfolio's beta. Is the portfolio aggressive or defensive? d) If an investment's expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph Question 3 From the information generated in the previous two questions; a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50- 50 investment allocation in each investment alternative
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Answer 1 The parts in the above table that are shaded in yellow are as follows Mean 105 Standard Deviation 125 Coefficient of Variation 119 Covariance with MP 135 Correlation with Market Index 066 Bet... View the full answer
Related Book For
Introduction to Financial Accounting
ISBN: 978-0133251036
11th edition
Authors: Charles Horngren, Gary Sundem, John Elliott, Donna Philbrick
Posted Date:
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