2. Consider the following expected returns, volatilities, and correlations: Expected Standard Stock Return Deviation Correlation with Vital Correlation with Mital Correlation with Pital Vital 14% 6% 1.0 -1.0 0.0 Mital 44% 24% -1.0 1.0 0.7 Pital 23% 14% 0.0 0.7 1.0 a. Imagine a portfolio comprising solely of Vital and Mital. What portion of should be allocated to Vital stock to ensure a risk-free investment? your investment b. What is the portfolio's volatility when holding a $10,000 long position in Pital and a $2000 short position in Mital? wwwww c. In a market, there are two securities, Artis and Brotis. Currently, the price of Artis stands at £50. Looking ahead, the price of Artis next year will be £40 during a recession, £55 in normal economic times, and £60 in an expanding economy. The probabilities associated with recession, normal times, and expansion are 0.1, 0.8, and 0.1, respectively. Artis does not pay dividends and has a correlation of 0.8 with the market. On the other hand, Brotis has an expected return of 9 percent, a standard deviation of 12 percent, a correlation of 0.2 with the market, and a correlation of 0.6 with Artis. The market portfolio itself has a standard deviation of 10 percent. If you are an investor primarily concerned about systematic risk, which security would you favor, and why? d. Critically evaluate the usefulness of the CAPM as a model for determining security returns. |
2. Consider the following expected returns, volatilities, and correlations: Expected Standard Stock Return Deviation Correlation with Vital Correlation with Mital Correlation with Pital Vital 14% 6% 1.0 -1.0 0.0 Mital 44% 24% -1.0 1.0 0.7 Pital 23% 14% 0.0 0.7 1.0 a. Imagine a portfolio comprising solely of Vital and Mital. What portion of should be allocated to Vital stock to ensure a risk-free investment? your investment b. What is the portfolio's volatility when holding a $10,000 long position in Pital and a $2000 short position in Mital? wwwww c. In a market, there are two securities, Artis and Brotis. Currently, the price of Artis stands at £50. Looking ahead, the price of Artis next year will be £40 during a recession, £55 in normal economic times, and £60 in an expanding economy. The probabilities associated with recession, normal times, and expansion are 0.1, 0.8, and 0.1, respectively. Artis does not pay dividends and has a correlation of 0.8 with the market. On the other hand, Brotis has an expected return of 9 percent, a standard deviation of 12 percent, a correlation of 0.2 with the market, and a correlation of 0.6 with Artis. The market portfolio itself has a standard deviation of 10 percent. If you are an investor primarily concerned about systematic risk, which security would you favor, and why? d. Critically evaluate the usefulness of the CAPM as a model for determining security returns. |
Chapter6: Risk And Return
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:2. Consider the following expected returns, volatilities, and correlations:
Expected Standard
Stock
Return Deviation
Correlation
with Vital
Correlation
with Mital
Correlation
with Pital
Vital
14%
6%
1.0
-1.0
0.0
Mital
44%
24%
-1.0
1.0
0.7
Pital
23%
14%
0.0
0.7
1.0
a. Imagine a portfolio comprising solely of Vital and Mital. What portion of
should be allocated to Vital stock to ensure a risk-free investment?
your investment
b. What is the portfolio's volatility when holding a $10,000 long position in Pital and a $2000
short position in Mital?
wwwww
c. In a market, there are two securities, Artis and Brotis. Currently, the price of Artis stands at
£50. Looking ahead, the price of Artis next year will be £40 during a recession, £55 in
normal economic times, and £60 in an expanding economy. The probabilities associated
with recession, normal times, and expansion are 0.1, 0.8, and 0.1, respectively. Artis does
not pay dividends and has a correlation of 0.8 with the market. On the other hand, Brotis
has an expected return of 9 percent, a standard deviation of 12 percent, a correlation of 0.2
with the market, and a correlation of 0.6 with Artis. The market portfolio itself has a standard
deviation of 10 percent. If you are an investor primarily concerned about systematic risk,
which security would you favor, and why?
d. Critically evaluate the usefulness of the CAPM as a model for determining security returns. |
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning