A mvetorwaheswa estrwt a portfolio by borrowing 35% ofhis original wealth and me

Question

A mvetorwaheswa estrwt a portfolio by borrowing 35% ofhis original wealth and menng all money m a stock index Thereturn on the risk-free asset is 400% and the expected return onthemk mix is 15%Cakulate the expected return on the portfolio & b. 18.25% 18.55% 1500% 11.15% e. 19. A thiend has some reliable infvrmation that the stock of Prubdles Company is going to rise $43.00 o $$0.00 per share over the next year. You know that the annual returm on the S&P; 500 been l 1% and the ooday T-bill rate hasbeen yielding 5% per year over thepastio years. If beta fvr Pudiles is 1.S, will you purchase the stock? a Yes because it is evervaloed. h Yes because it is undervalued c. Na, because it is undervalued d. Na, because it is overvalued e Yes because the expected return equals the estimated return 20. The correlation coefficient between the market return and a risk-free asset would e be Zero.

Explanation / Answer

1) Solution: 18.85%

Working: (0.35 * 4) + (1.35*15) = 18.85%

2) Solution: Yes, because it is undervalued.

Explanation:

Expected Return = 5 + (1.5)(11 5) = 14.0%

Estimated Return = (50 43) 43 = 16.28%

Estimated Return exceeds the expected return thus the stock is undervalued and must be purchased

3) Solution: be zero

Explanation: The correlation coefficient between the market return and a risk free asset would equal zero

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.