1. The following information is available on the percentage rates of return on various assets for the last three years. You determine that this is a sample which is representative of the data population for these securities. Security Year 1 Year 2 Year 3<\/p>\n
Share A \u22126% \u221218% 60%<\/p>\n
Share B 32% \u221222% 35%<\/p>\n
Market 50% \u221210% 20%<\/p>\n
Government Bonds 10% 10% 10%<\/p>\n
(a) Consider only shares A and B for this part. Compute the portfolio weights that yield the portfolio of A and B which has the lowest possible standard deviation. Then compute that portfolio\u2019s expected return and standard deviation. Hint: Write down the formula for this, then compute all the ingredients you require.<\/p>\n
(b) What is the numerical equation for the Capital Markets Line in this situation?<\/p>\n
(c) Do shares A and B plot on the Securities Market Line? Hint: you will have to determine Betas in order to figure this out.<\/p>\n
2. Determine whether the following statements are true or false and in either case briefly explain why.<\/p>\n
(a) Assume the CAPM holds. Two stocks A and B have the same Beta, but stock A has much higher idiosyncratic risk than stock B. This means that stock A must have a higher expected return than B to reward risk-averse investors for holding the additional risk.<\/p>\n
(b) Assume that a risk-free asset as well as two risky securities exist in the economy. If the risky securities are perfectly positively correlated with each other, diversifying among the two will not make a greedy risk-averse investor better off. Hint: it may be worth drawing a diagram to clarify your point.<\/p>\n
3. Assume that the CAPM holds. Cella, Inc stock is currently trading at $50 per share and the security\u2019s expected return is 15% per year. You expect all of this return to be paid as a cash dividend; no price 1 increase is expected. The risk-free rate is 5% per year and the market\u2019s risk premium is 9%. What will be Cella, Inc\u2019s new equilibrium price if its covariance with the market portfolio doubles, but everything else (including the dollar-value of the cash dividend) remains the same?<\/p>\n
4. While Peter Lynch was the manager of Fidelity\u2019s Magellan fund family, these funds outperformed the S&P 500 in 11 out of 13 years, and in those years they outperformed by an average of 10%. Do these facts alone constitute evidence against market efficiency? <\/p>\n","protected":false},"excerpt":{"rendered":"
1. The following information is available on the percentage rates of return on various assets for the last three years. You determine that this is a sample which is representative of the data population for these securities. Security Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-118186","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/118186","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=118186"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/118186\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=118186"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=118186"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=118186"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}