Recall the beta-representation of asset return: R = R + i(Rm R) + . In...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Recall the beta-representation of asset return: R₁ = Rƒ + ßi(Rm − Rƒ) + €¿. In ex- pectation, this becomes E(R₂) = Rƒ + ßi(E(Rm) — Rf) since the residual return € (or idiosyncratic bit of the return not explained by CAPM) is mean zero. Let E(Rm) = 0.1, and Rf = 0.05. Also, let the variance of the market return, o = 0.25. 0.8. Further, Consider a portfolio of two stocks A and B with betas, BA leto² = 0.2 and ² 0.2 and 2 = 0.16 be the residual variance of the two stock returns i.e. the variance of the e bit in the CAPM equation. EB = 1.5 and BB = a) Compute the expected return, portfolio beta (p), and total portfolio variance (0²) for an equally weighted portfolio of A and B. b) Compute the expected return, portfolio beta, and total portfolio variance of an equally weighted portfolio of A and B if it is 50% financed by borrowing (at the risk-free rate)? Recall the beta-representation of asset return: R₁ = Rƒ + ßi(Rm − Rƒ) + €¿. In ex- pectation, this becomes E(R₂) = Rƒ + ßi(E(Rm) — Rf) since the residual return € (or idiosyncratic bit of the return not explained by CAPM) is mean zero. Let E(Rm) = 0.1, and Rf = 0.05. Also, let the variance of the market return, o = 0.25. 0.8. Further, Consider a portfolio of two stocks A and B with betas, BA leto² = 0.2 and ² 0.2 and 2 = 0.16 be the residual variance of the two stock returns i.e. the variance of the e bit in the CAPM equation. EB = 1.5 and BB = a) Compute the expected return, portfolio beta (p), and total portfolio variance (0²) for an equally weighted portfolio of A and B. b) Compute the expected return, portfolio beta, and total portfolio variance of an equally weighted portfolio of A and B if it is 50% financed by borrowing (at the risk-free rate)?
Expert Answer:
Answer rating: 100% (QA)
a For an equally weighted portfolio of stocks A and B the expected return ERp portfolio beta p and total portfolio variance p can be calculated as fol... View the full answer
Related Book For
Statistics For Business Decision Making And Analysis
ISBN: 9780321890269
2nd Edition
Authors: Robert Stine, Dean Foster
Posted Date:
Students also viewed these finance questions
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
This case study on project evaluation is applicable for beginning courses in corporate finance or finance strategy. Two alternative investment options are available to evaluate. Challenges are...
-
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...
-
Ames Manufacturing Plant produces two different replacement parts for dishwashers. During a normal shift, they have 7 hours of time available on their main fabrication machine. The machine will...
-
The following data, presented in alphabetical order, are taken from the records of Urbina Corporation. Accounts payable ......................... $ 240,000 Accounts receivable...
-
Pome Company produces a single product: the Core. The following table provides the Cores details. For the upcoming year, Pome Company expects to sell 500,000 units of the Core, have total fixed costs...
-
The following scenarios describe situations faced by hypothetical companies that currently have a centralized organization structure. As you review each of the scenarios, provide your opinion as to...
-
Pringle Corporation has been authorized to issue 20,000 shares of $100 par value, 7%, noncumulative preferred stock and 1,000,000 shares of no-par common stock . The corporation assigned a $5 stated...
-
Part 1: How long does it take for an investment to double in value if it earns (a) 4%, (b) 6%, (c) 9%, (d) 12%, (e) 15% annual compound interest? Solve above using method of 1) Interpolation (Using...
-
OMalley plc requires a bank loan for additional working capital to finance expansion. The bank has requested an audited income statement for the year 2022. The accountant for OMalley plc provides you...
-
A frictionless and leak-proof piston with a de (in kg) and negligible thickness, is in equilibrium as shown in the figure with gas below it and water above it till the top. The cross-sectional area...
-
What do we know about a good when it has a perfectly inelastic supply?
-
We will always find worthy causes that need funds. Does that mean we should pull back funds on worthy causes? Can we get funds by reducing fraud, lowering politicians paychecks, perhaps trimming some...
-
In the 1930s, communism and socialism were on the rise, partially in response to the grinding poverty, joblessness, and despair. The Communists claimed that "communism is the new Americanism."...
-
Why should we trade? What is the gain from trade? Is carry trade any different? Is outsourcing a good idea for a company and the economy?
-
Did COVID-19 reveal the objective reality of the class system in Canada? o The Upper or ownership Class has wealth sufficient to make them independent of broader economic forces o The Middle class...
-
Draw the Lewis structures for each molecule in the table,calculate the formal charges and then build a model of thestructure and identify the geometry: what about SeF5?? Species SO SeF5 CH3NH SCN-...
-
Will the prediction interval always be wider than the estimation interval for the same value of the independent variable? Briefly explain.
-
1. Table of cross-classified counts 2. Counts cases that match values of two categorical variables 3. Shown in the bar chart of a categorical variable 4. Shown in a stacked bar chart 5. Measure of...
-
1. A sampling distribution describes the variability among average weights from day to day. 2. Before using a normal model for the sampling distribution of the average package weights, the manager...
-
Which is shorter, a 95% z-interval for or a 95% t-interval for ? Is one of these always shorter, or does the outcome depend on the sample?
-
The SDLC is just one model for systems development. Find at least one more and describe the differences.
-
Draw DFDs for each of these scenarios: (a) A customer goes into a bookshop and asks for this book. The member of staff looks for the book in the online stock catalogue and reports that the book is...
-
Draw an entity model to model this university scenario: A university department employs lecturers and clerical staff. It offers a three-year degree. A student has to take 12 modules during the...
Study smarter with the SolutionInn App