Question 1

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 8.3. The average return for Radtron is

Accepted Answer

R (Proxy)= (12 + 10 - 8 - 10)/4 = 4/4 = 1%

Question 2

Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

The answer of Assume that as a portfolio manager the...

Question 3

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 8.3. What is the beta for Radtron using the proxy index?

Accepted Answer

$$\begin{array} { l c l c } 
( 12 - 1 ) ^ { 2 } = & 121 & ( 15 - 5 ) ^ { 2 } = & 100 \
( 10 - 1 ) ^ { 2 } = & 81 & ( 13 - 5 ) ^ { 2 } = & 64 \
( - 8 - 1 ) ^ { 2 } = & 81 & ( - 8 - 5 ) ^ { 2 } = & 169 \
( - 10 - 1 ) ^ { 2 } = & \frac { 121 } { 4 [ 1 / 4 } = 101 & ( 0 - 5 ) ^ { 2 } = & \frac { 25 } { 350 / 4 } = 89.50
\end{array}$$ 88 ¸ 101 = 0.87

Question 4

An investor wishes to construct a portfolio by borrowing 35% of his original wealth and investing all the money in a stock index. The return on the risk-free asset is 4.0% and the expected return on the stock index is 15%. Calculate the expected return on the portfolio.

Accepted Answer

Let's assume the investor has $100, then borrowing 35% of the original wealth gives $35. Therefore, the total investment is $135.

Expected return on the portfolio = (1-borrowing percentage)*(risk-free rate) + (borrowing percentage)*(expected return on stock index)
= (1-0.35)*(4.0%) + (0.35)*(15.0%)
= 2.6% + 5.25%
= 7.85%

But the above calculation only gives us the expected return on the invested amount ($135). To get the expected return on the portfolio (which includes the borrowed amount as well), we need to subtract the borrowing amount from the total investment before calculating the expected return:

Expected return on the portfolio = (total investment - borrowing amount)*expected return on the investment
= (135 - 35)*15.0%
= 100*15.0%
= 15.0%

Therefore, the expected return on the portfolio is 15%, which is the same as the expected return on the stock index. However, since the investor has borrowed money to invest in the stock index, the actual return on the portfolio will depend on the stock returns. If the stock returns are higher than expected, the actual return on the portfolio will be higher than 15%, but if the stock returns are lower than expected, the actual return on the portfolio will be lower than 15%.

Option B (18.85%) is incorrect as the expected return on the portfolio cannot be higher than the expected return on the stock index in this scenario.

Question 5

Assume that as a portfolio manager the beta of your portfolio is 1.1 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

The answer of Assume that as a portfolio manager the...

Question 6

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. The standard deviation of returns on the stock index is 6%. Calculate the expected standard deviation of the portfolio.

Accepted Answer

0.7(6)= 4.2%

Question 7

Assume that as a portfolio manager the beta of your portfolio is 1.4 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

The answer of Assume that as a portfolio manager the...

Question 8

Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5% and the expected return on the stock index is 15%. The estimated return on the asset is 20%. Calculate the alpha for the asset.

Accepted Answer

The answer of Consider an asset that has a beta...

Question 9

Assume that as a portfolio manager the beta of your portfolio is 1.2 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

The answer of Assume that as a portfolio manager the...

Question 10

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 8.3. The average proxy return is

Accepted Answer

R (Radtron)= (10 + 12 - 10 - 4)/4 = 8/4 = 2%

Question 11

Assume that as a portfolio manager the beta of your portfolio is 1.15 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

The answer of Assume that as a portfolio manager the...

Question 12

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 8.3. The average true return is

Accepted Answer

R (True)= (15 + 13 - 8 + 0)/4 = 20/4 = 5%

Question 13

Assume that as a portfolio manager the beta of your portfolio is 0.85 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Accepted Answer

The answer of Assume that as a portfolio manager the...

Question 14

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 8.3. The covariance between Radtron and the true index is

Accepted Answer

The covariance between Radtron and the true index is given by the value in the top right cell of the covariance matrix, which is 86.50.

Question 15

The variance of returns for a risky asset is 25%. The variance of the error term, Var(e), is 8%. What portion of the total risk of the asset, as measured by variance, is systematic?

Accepted Answer

8%/25% = 0.32.1 - 0.32 = 68% systematic.

Question 16

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 8.3. What is the beta for Radtron using the true index?

Accepted Answer

Using the formula for beta, β = Cov(Radtron, True Index) / Var(True Index), we can calculate the beta for Radtron as:

β = (0.1136) / (0.1171)
β = 0.970

Therefore, the answer is B) 0.97.

Question 17

Recently your broker has advised you that he believes that the stock of Casey Incorporated is going to rise from $55.00 to $70.00 per share over the next year. You know that the annual return on the S&P 500 has been 12.5% and the 90-day T-bill rate has been yielding 6% per year over the past 10 years. If beta for Casey is 1.3, will you purchase the stock?

Accepted Answer

To calculate the expected return on Casey Incorporated, we will use the Capital Asset Pricing Model (CAPM):
Expected Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Risk-free Rate = 6%
Beta = 1.3
Market Return = 12.5%
Expected Return = 6% + 1.3 * (12.5% - 6%) = 15.6%
Since the expected return of 15.6% is greater than the anticipated rise in stock price of 27% (100% x (70-55)/55), it is undervalued and worth purchasing. Therefore, the correct answer is B, Yes, because it is undervalued.

Question 18

A friend has information that the stock of Zip Incorporated is going to rise from $62.00 to $65.00 per share over the next year. You know that the annual return on the S&P 500 has been 10% and the 90-day T-bill rate has been yielding 6% per year over the past 10 years. If beta for Zip is 0.9, will you purchase the stock?

Accepted Answer

Expected Return = 6 + (0.9)(10 - 6)= 9.6%
Estimated Return = (65 - 62)¸ 62 = 4.80%
Estimated Return < Expected Return
$ \therefore $ Stock is overvalued and should not be purchased.

Question 19

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. Calculate the expected return on the portfolio.

Accepted Answer

E(R)= 0.3(4.5)+ 0.7(12)= 9.75%

Question 20

Exhibit 8.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 8.3. The covariance between Radtron and the proxy index is

Accepted Answer

$$\begin{array} { l c } 
( 10 - 2 ) ( 12 - 1 ) = & 88 \
( 12 - 2 ) ( 10 - 1 ) = & 90 \
( - 10 - 2 ) ( - 8 - 1 ) = & 108 \
( - 4 - 2 ) ( - 10 - 1 ) = & 66 \&\underline{ { 352 / 4 }} = 88.00
\end{array}$$

Quiz 8: An Introduction to Asset Pricing Models

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. The average return for Radtron is

Assume that as a portfolio manager the beta of your portfolio is 1.3 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. What is the beta for Radtron using the proxy index?

An investor wishes to construct a portfolio by borrowing 35% of his original wealth and investing all the money in a stock index. The return on the risk-free asset is 4.0% and the expected return on the stock index is 15%. Calculate the expected return on the portfolio.

Assume that as a portfolio manager the beta of your portfolio is 1.1 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Assume that as a portfolio manager the beta of your portfolio is 1.4 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5% and the expected return on the stock index is 15%. The estimated return on the asset is 20%. Calculate the alpha for the asset.

Assume that as a portfolio manager the beta of your portfolio is 1.2 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. The average proxy return is

Assume that as a portfolio manager the beta of your portfolio is 1.15 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. The average true return is

Assume that as a portfolio manager the beta of your portfolio is 0.85 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML?

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. The covariance between Radtron and the true index is

The variance of returns for a risky asset is 25%. The variance of the error term, Var(e) , is 8%. What portion of the total risk of the asset, as measured by variance, is systematic?

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. What is the beta for Radtron using the true index?

An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. Calculate the expected return on the portfolio.

Exhibit 8.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 8.3. The covariance between Radtron and the proxy index is