User Account

All Pages

Representative investors average degree of risk aversion

Assignment Help Financial Management
Reference no: EM13871553

1. The expected rate of return on the market portfolio is 9.50% and the risk–free rate of return is 1.00%. The standard deviation of the market portfolio is 17.75%. What is the representative investor’s average degree of risk aversion?

2. Stock A has a beta of 1.90 and a standard deviation of return of 36%. Stock B has a beta of 3.95 and a standard deviation of return of 68%. Assume that you form a portfolio that is 60% invested in Stock A and 40% invested in Stock B. Using the information in question 1, according to CAPM, what is the expected rate of return on your portfolio?

3. Using the information in questions 1 and 2, what is your best estimate of the correlation between stocks A and B?

4. Your forecasting model projects an expected return of 17.50% for Stock A and an expected return of 33.75% for Stock B. Using the information in questions 1 and 2 and your forecasted expected returns, what is your best estimate of the alpha of your portfolio when using CAPM to determine a fair level of expected return?

5. A different analyst uses a two–factor APT model to evaluate expected returns and risk. The risk premiums on the factor 1 and factor 2 portfolios are 4.25% and 2.40%, respectively, while the risk–free rate of return remains at 1.00%. According to this APT analyst, your portfolio formed in question 2 has a beta on factor 1 of 3.95 and a beta on factor 2 of 3.25. According to APT, what is the expected return on your portfolio if no arbitrage opportunities exist?

6. Now assume that your forecasting model of question 4 accurately projects the expected return of Stocks A and B and therefore your portfolio, and that the APT model of question 5 describes the fair rate of return for your portfolio. Do any arbitrage opportunities exist? If yes, would you invest long or short in your portfolio constructed in question 2?

Reference no: EM13871553

Questions Cloud

Do you agree with the court ruling why or why not : The basic facts of the case including the state, city, and whether the original trial court was a state or federal court, The legal issue(s) the court dealt with in the case, The court's ultimate legal ruling in the case and Do you agree with the cou..
Elect to report any governmental or enterprise fund : In the fund financial statements a government may elect to report any governmental or Enterprise Fund as major if the government considers financial information on that fund particularly important to statement users.
Implement the same trading idea without using forwards : Suppose you have a portfolio that contains stocks that track the market index. You now want to change this portfolio to be 25% in commodities and 75% in the market index. How would you use derivatives to implement your strategy? How would you impleme..
What is the expected return of a stock with a beta : A certain stock has a beta of 1.3. If the risk-free rate of return is 3.2 percent and the market risk premium is 7.5 percent, what is the expected return of the stock? What is the expected return of a stock with a beta of .75?
Representative investors average degree of risk aversion : The expected rate of return on the market portfolio is 9.50% and the risk–free rate of return is 1.00%. The standard deviation of the market portfolio is 17.75%. What is the representative investor’s average degree of risk aversion?
Problems that are encountered in assembling and managing : problems that are encountered in assembling and managing integrated health care delivery systems?
What risks did the authors of the constitution take : What risks did the authors of the Constitution take in the Revolutionary War? How would they have been seen differently by historians had the United States not won the war? Why is it important to protect the citizens of a democratic country from a..
What are the characteristics of a domestic bond : What are the characteristics of a domestic bond? an international bond? a foreign bond? a Eurobond? a global bond? What are the benefits and drawbacks of offering securities in bearer form relative to registered form?
Advantages and disadvantages of new public management : What do you consider to be the chief advantages and disadvantages of new public management (NPM)? Why? Choose a state or local jurisdiction that has adopted an NPM approach. What effect has the NPM approach had

Reviews

Write a Review

Financial Management Questions & Answers

  What is the new cost of goods sold percent of sales

What is the new cost of goods sold percent of sales for each of the countries and what are your recommendations on choice of country?

  What is the expected annual inflation rate

A one-year U.S. Treasury security has a nominal interest rate of 2.25 percent. If the expected real rate of interest is 1.50 percent, what is the expected annual inflation rate?

  Use no-arbitrage arguments

A stock price is currently $80. It is known that at the end of four months it will be either $75 or $85. The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a four-month European put option with a strike pric..

  Forecasting cash flows

Your company is forecasting cash flows of $15 million next year, $25 million in year 2 and $40 million in year 3. After that growth in cash flows is expected to level out at 5% per year. Your company has $150 million in marketable securities and $350..

  A widget manufacturer currently produces

A widget manufacturer currently produces 300,000 units a year. It buys widget lids from an outside supplier at a price of $4 a lid. The plant manager believes that it would be cheaper to make these lids rather than buy them. Direct production costs a..

  Calculate the cash flow effect of nickolas restructuring

Calculate the cash flow effect of Nickolas restructuring during fiscal 2014 - What affect did this have on The Bean's consolidated income statement for the current year?

  Government budgeting and expenditures

Government Budgeting and Expenditures, Based on the second e-Activity that focuses on the Budget of the United States Government for Fiscal Year 2014 and 2015, analyze the president's messages and the three (3) budgets you selected

  What rate of return can he expect

What is the value of firm L according to MM's proposition 1 with corporate taxes and micky is the holder of $30,000 worth of L's stock. What rate of return can he expect, assuming a dividend payout of 100%.

  Calculate the net profit margin and return on assets

Quinn Corporation produces $2 million in profits with $28 million in sales. It has total assets of $15 million. Calculate the net profit margin and return on assets (ROA)?

  What constant rate is the stock expected to grow after year

Mitts Cosmetics Co.'s stock price is $60.31, and it recently paid a $2.50 dividend. This dividend is expected to grow by 24% for the next 3 years, then grow forever at a constant rate, g; and rs = 15%. At what constant rate is the stock expected to g..

  Considering adopting the income tax

Suppose the state of California approved the use of local option income taxes (personal and corporate). You work in the finance department of a county government and the country is considering adopting the income tax.

  Real interest rates are generally higher than nominal rate

On average, a coupon bond will increase in value as it approaches maturity. A bond with a coupon rate higher than its yield is worth more than its par value. Real interest rates are generally higher than nominal interest rates.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd