You are working as an intern for the hedge fund AQR Capital, which is a quantitative...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are working as an intern for the hedge fund AQR Capital, which is a quantitative hedge fund based in the United States. AQR Capital is famous for relying on quantitative strategies for selecting stocks and other securities. Your boss, Mr. Lasse Pederson, asked you to exam the some investment opportunities. There were three stocks, Microsoft, GE, and Amazon, whose characteristics are summarized in the following table, with some cells intentionally left blank. Moreover, the risk-free asset has a return of 3% per year in the United States. All assumptions underlying the Capital Asset Pricing Model (CAPM) hold. Stock Characteristics Microsoft GE Amazon Expected Return 6% 15% 1.50 2.00 a. (4 points) Plot Microsoft, GE and Amazon using the information in the above table together with the Security Market Line. (You should indicate the intercept and slope of the Security Market Line, and indicate the positions of Microsoft, GE and Amazon in the Security Market Line). b. (2 points) What is the expected market return? c. (5 points) Assume your boss, Lasse Pederson, gave you $1 million to investment. You decided to buy $0.2 million worth of Microsoft stocks, $0.2 million worth of GE stocks, and $ 0.5 million worth of Amazon stocks, and invest the rest of the money at the risk free rate. Calculate the expected return and beta of your portfolio. d. (4 points) Your investment advisor, Mr. Peter Lynch, came to your office and was excited to recommend one stock, Retail Inc., to you. His argument was that he believed the stock Retail Inc. would have an expected return of 8.5% per year, but with total volatility (standard deviation of stock returns) about 10% per year. Meanwhile, Mr. Peter Lynch mentioned that the beta of Retail Inc. is 1.2. Are you going to buy the stock of Retail Inc.? If not, at what rate of return would you be willing to purchase this stock? You are working as an intern for the hedge fund AQR Capital, which is a quantitative hedge fund based in the United States. AQR Capital is famous for relying on quantitative strategies for selecting stocks and other securities. Your boss, Mr. Lasse Pederson, asked you to exam the some investment opportunities. There were three stocks, Microsoft, GE, and Amazon, whose characteristics are summarized in the following table, with some cells intentionally left blank. Moreover, the risk-free asset has a return of 3% per year in the United States. All assumptions underlying the Capital Asset Pricing Model (CAPM) hold. Stock Characteristics Microsoft GE Amazon Expected Return 6% 15% 1.50 2.00 a. (4 points) Plot Microsoft, GE and Amazon using the information in the above table together with the Security Market Line. (You should indicate the intercept and slope of the Security Market Line, and indicate the positions of Microsoft, GE and Amazon in the Security Market Line). b. (2 points) What is the expected market return? c. (5 points) Assume your boss, Lasse Pederson, gave you $1 million to investment. You decided to buy $0.2 million worth of Microsoft stocks, $0.2 million worth of GE stocks, and $ 0.5 million worth of Amazon stocks, and invest the rest of the money at the risk free rate. Calculate the expected return and beta of your portfolio. d. (4 points) Your investment advisor, Mr. Peter Lynch, came to your office and was excited to recommend one stock, Retail Inc., to you. His argument was that he believed the stock Retail Inc. would have an expected return of 8.5% per year, but with total volatility (standard deviation of stock returns) about 10% per year. Meanwhile, Mr. Peter Lynch mentioned that the beta of Retail Inc. is 1.2. Are you going to buy the stock of Retail Inc.? If not, at what rate of return would you be willing to purchase this stock?
Expert Answer:
Answer rating: 100% (QA)
Solution a Plot Microsoft GE and Amazon using the information in the above table together with the Security Market Line The Security Market Line SML is given by R Rf Rm Rf where R expected return of a ... View the full answer
Related Book For
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates
Posted Date:
Students also viewed these finance questions
-
You are working as an intern in the payroll department of a large company. Your best friend, who helped you get the job, works at the same company in sales. Your friend calls you when he is traveling...
-
You are working as an intern at Coral Gables Products, a privately owned manufacturing company. Shortly after you read Chapter 13 in this book, you got into a discussion with the Chief Financial...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Bonita Company's income statement contained the following condensed information. BONITA COMPANY Income Statement For the Year Ended December 31, 2022 Service revenue Operating expenses, excluding...
-
A security analyst states. Accountants could increase the usefulness of income statements if they included only recurring income items in the income statement and reported nonrecurring items directly...
-
Assuming that the following variables have been declared: evaluate the following expressions: a. str1.length() b. str1.charAt(7) c. str2.charAt(0) d. str1.indexOf("o") e. str2.toUpperCase() f....
-
What is a UC scenario?
-
During its first year of operations, Gehrig Company had credit sales of $3,000,000, of which $400,000 remained uncollected at year-end. The credit manager estimates that $18,000 of these receivables...
-
What is the most efficient speed to drive? Assume that a modern car has a 2 m2 frontal area and a drag coefficient of 0.25. Assume that there are two sources of energy dissipated during driving: a...
-
A bank has $650,000 in assets to allocate among investments in bonds, home mortgages, car loans, and personal loans. Bonds are expected to produce a return of 10%, mortgages 8.5%, car loans 9.5%, and...
-
Avila Company purchases all supplies on account and then pays for the supplies 30 days later. Use the following information to compute how much Avila Co. paid during the month. Accounts Payable,...
-
Franziska and Safua play the game Halvsies. The game is set up with one pile of 5 stones, one pile of 8 stones, and one pile of 11 stones. Franziska, who's younger than Safua, always goes first. On...
-
Consider an interprocess-communication that uses mailboxes: // send msg to Process Id, TOID mailbox: receive (FromID, msg) // receive msg from process id, FromID mailbox: send (TOID, msg) Is it...
-
The frequency distribution shows the average number of pupils per teacher in some states of the United States. Find the variance and standard deviation for the data. Round your answers to one decimal...
-
1. Write an LMC (Little Man Computer) program to do the following task. if (value == 0) { } some_statements; next_statement;
-
A New York Times article reported that a survey conducted in 2014 included 36,000 adults, with 3.7% of them being regular users of e-cigarettes. Because e-cigarette use is relatively new, there is a...
-
You will be creating only external value chain maps Use LucidChart app to create map if possible Instructions : Now that you are more familiar with the diagramming tool create an overview map of...
-
What is the difference between the straight-line method of depreciation and the written down value method? Which method is more appropriate for reporting earnings?
-
Complete the balance sheet of Flying Roos Corporation. You have the following information: Debt ratio = 40% DSO = 39 days Current ratio = 1.5 Inventory turnover ratio = 3.375 Sales = $2.25 million...
-
Tonalli is putting together a portfolio of 10 stocks in equal proportions. What is the relative importance of the variance for each stock versus the covariance for the pairs of stocks? For this...
-
How does a stock dividend differ from other types of dividends?
-
A multiple-leaf spring used in automobiles is shown in Fig. 12.17. It consists of five leaves, each of thickness \(t=0.65 \mathrm{~cm}\) and width \(w=3.8 \mathrm{~cm}\). For the multiple-leaf spring...
-
Fill in the Blank. For a thin beam element, __________ degrees of freedom are considered at each node.
-
True or False. The Rayleigh-Ritz method assumes that the solution is a series of functions that satisfy the boundary conditions of the problem.
Study smarter with the SolutionInn App