Hrm 531 Week 3 Regression Analysis Paper

15. Investment A has an expected return of $25 million and investment B has an expected return of $5 million. Market risk analysts believe the standard deviation of the return A is $10 million, and for B is $30 million (negative returns are possible here).

a. Calculate the expected return over the 4-year period for each of the three alternatives.

B. can take on negative values C. is related to the covariance of a share D. All of the given answers. 11. Portfolio risk is heavily based on: A. a simple average of the variance of the stocks in the portfolio B. a weighted average of the variance of the stocks in the portfolio C. a weighted average of the covariance of the stocks in the portfolio D. the standard deviation of the stocks 12. When an investor alters the mix of their portfolio to reflect market changes, this is called _____ asset allocation A. market timing B. passive

Portfolio Return of a portfolio with two stocks (Stock A and Stock B) is given by following formula:

i. (1) Write out the SML equation, use it to calculate the required rate of return on each alternative, and then graph the relationship between the expected and required rates of return. (2) How do the expected rates of return compare with the required rates of return? (3) Does the fact that Collections has a negative beta coefficient make any sense? What is the implication of the negative beta? (4) What would be the market

a particular asset has a beta of 1.2 and an expected return of 10%. The expected return on the market portfolio is 13% an the risk-free is 5%. Which of the following statement is correct?

There are several ways that you can form your portfolio, combine Vanguard and Hasbro; combine Vanguard and Reynolds; combine Vanguard, Hasbro and Reynolds. If you chose to combine Vanguard and Hasbro together, and you are going to keep the standard deviation as 6 (the average standard deviation of these three asset), you can invest 47% in Vanguard and 53% in Hasbro with an expected return of 0.89. If you chose to combine Vanguard and Reynolds and keep the standard deviation as 6, you can invest 58% in Vanguard and 42% in Reynolds with an expected return of 1.11. And if you chose to invest certain amount in Vanguard, Hasbro and Reynolds, again try to keep the standard deviation as 6, you can invest 30% in Vanguard, 62% in Reynolds and 0.08% in Hasbro.

7. How might you use this three asset optimal-allocation model to construct and graph an

b. Plot the CAL along with a couple of indifference curves for the investor type identified above. c. Use Excel’s solver to maximize the investor’s utility and confirm that you get a 50% allocation in stocks. 3. You can invest in a risky asset with an expected rate of return of 20% per year and a standard deviation of 40% per year or a risk free asset earning 4% per year or a combination of the two. The borrowing rate is 9% per year. a. What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which the allocation to this risky investment is 100%? b. Draw the Capital Allocation Line. Indicate the points corresponding to (i) 50% in the risk-less asset and 50% in the risky asset; and (ii) -50% in the riskless asset and 150% in the risky asset. c. Compute the expected rate of return and standard deviation for (i) and (ii). d. Suppose you have a target risk level of 50% per year. How would you construct a portfolio of the risky and the riskless asset to attain this target level of risk? What is the

5. With respect to b), what would be the effect of the bondization and equitization overlay program on the expected return of the absolute return portfolio? Which contracts would be the most

3. The expected return for each firm was calculated: Expected Return = Alpha + (Beta x BSE 500 actual return).

Alex Sharpe should invest in Portfolio A, consisting of Reynolds and S&P500. Portfolio A gives higher return with lower risk. The standard deviation and the variance are both lower for portfolio A which means

Q2. Provide a full-page plot of the Capital Allocation Line for the case in Q1. Label the axes and locate cash, D. Equity, D. Bonds, and your optimal complete portfolio clearly on the plot. You may draw this plot by hand.

The remaining alternatives for this client are to invest in U.S. Rubber, a market portfolio, and a 2-stock portfolio of High Tech and Collections. The expected rates of return are 9.8% in U.S. Rubber, 10.5% in a market portfolio, and 6.7% in the 2-stock portfolio.

Finally, when the expected return up to 10 percent, it will result an undiversified and higher risk portfolio whereby dependent based on the higher risk financial assets.