What is expected return, Finance Basics

Assignment Help:

1. Using the variance-covariance matrix (∑) and the expected return vector (er) given in the appendix, calculate the set of weights that correspond to the portfolio that maximizes the Sharpe Ratio assuming a risk free rate of return of 3% per year, subject only to the constraint that the sum of the weights must be 1.

2. For the portfolio derived in (1) above, determine the expected annual return and the annual standard deviation for that portfolio. Also determine the Sharpe Ratio.

3. For each of the individual assets that comprise the optimal portfolio that you determined in (1) and (2) above, calculate the ratio of the expected return for each asset in excess of the risk-free rate to the marginal variance for that asset. Compare these values with the corresponding value for the portfolio as a whole. Is this what you expected? Why or why not?

4. Using the results determined above, if an investor has a risk aversion factor of 1.3 (A), identify his investment allocation to each individual asset included in his overall portfolio. What is his expected return? What is the standard deviation of that portfolio?

5. Repeat problem (4), but for an investor with a risk tolerance factor of 3.8 (A). Do the differences between the portfolio determined in (5) and the portfolio determined in (6) make sense? Why or why not?

6. Say that you run a well-diversified mutual fund and the expected return on that fund is 16.2% and the standard deviation of that fund is 30.7%. What is the largest fee that you can charge annually for investors wanting to invest in your fund in order for investors to be indifferent between investing in your fund or in the optimal portfolio that you determined in step (2)?

7. Calculate the betas for each of the individual assets that comprise the optimal portfolio with respect to that optimal portfolio.

8. Calculate the expected returns using the betas that you determined in (8) and the market expected return that you calculated in (2). The risk free rate is still 3%. Are these expected returns consistent with the input data?


Related Discussions:- What is expected return

Calculate the incremental net present value, The following NPV's have been ...

The following NPV's have been calculated to determine if a compressor installation should be accelerated from Year 3 to Year 7. The compressor cost is $1,500,000.   a. C

Profitability ratio, Profitability Ratio These ratios signify the perf...

Profitability Ratio These ratios signify the performance of the firm in relation to its capability to derive returns or profit from investment or from sale of goods that is pr

Growth rate, Growth rate : The average of PC manufacturing industry growth ...

Growth rate : The average of PC manufacturing industry growth rate was 22.24% for 2004, 20% for 2005, and 17.29% for 2006. It showed that the industry's growth rate has been declin

Accounting rate of return method or arr, Accounting Rate of Return Method o...

Accounting Rate of Return Method or ARR This method utilizes accounting profits from financial status to assess the viability of investment proposal via diving the average inc

calculate the growth rate, The Mountain Fresh Company had earnings per sha...

The Mountain Fresh Company had earnings per share (EPS) of $6.32 in 2006 and $11.48 in 2011. The company pays out 30 percent of its earnings as dividends per share (DPS), and the

Bureaucratic system of management, "Managerial leadership considers that th...

"Managerial leadership considers that the focus of school leaders ought to be on functions, tasks and behaviours and if these functions are carried out competently the work of othe

End of Chapter Problems, The Audiology Department at Randall Clinic offers ...

The Audiology Department at Randall Clinic offers many services to the clinic''s patients. The three most common , along with cost and utilization data, are as follows: Service Var

Types of partners, Types of Partners 1. General Partners -Unlimited ac...

Types of Partners 1. General Partners -Unlimited active and liability in participation in partnership activities. 2. Limited partners - Limited liability in the management of

Financial forecasting, Financial Forecasting Financial forecasting ref...

Financial Forecasting Financial forecasting refers to determination of the firm of financial requirements in advance. Financial forecasting is needs financial planning using b

Write Your Message!

Captcha
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!

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