You manage an equity fund with an expected risk premium of 10% and a standard deviation of 14%. The rate on Treasury bills is 6%. Your client chooses to invest $60,000 of her portfolio in your equity fund and $40,000 in a T-bill money market fund. What is the expected return and standard deviation of return on your client’s portfolio?
Expected return = 12%
Standard deviation of return =.8.4%
Expected risk premium = 10%
Standard deviation = 14%
Rate on treasury bills = 6%
Equity fund investment = $60,000
T-bill money market fund investment = $40,000
Expected return for your fund = T-bill rate + risk premium = 6% + 10% = 16%
Expected return of client’s overall portfolio = (0.6 x 16%) + (0.4 x 6%) = 12%
Standard deviation of client’s overall portfolio = 0.6 x 14% = 8.4%
Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model:
a. What is the expected return on the market portfolio?
b. What would be the expected return on a zero-beta stock?
c. Suppose you consider buying a share of stock at a price of $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluated at β = - .5. Is the stock overpriced or underpriced?
The security market line depicts:
a. A security’s expected return as a function of its systematic risk.
b. The market portfolio as the optimal portfolio of risky securities.
c. The relationship between a security’s return and the return on an index.
d. The complete portfolio as a combination of the market portfolio and the risk-free asset.
In Problems 21–23 below, assume the risk-free rate is 8% and the expected rate of return on the market is 18%.
I am buying a firm with an expected perpetual cash flow of $1,000 but am unsure of its risk. If I think the beta of the firm is zero, when the beta is really 1, how much more will I offer for the firm than it is truly worth?
94% of StudySmarter users get better grades.Sign up for free