1.Assuming the following expected returns for each asset, are the assets on the
ID: 2648857 • Letter: 1
Question
1.Assuming the following expected returns for each asset, are the assets on the securities market line? If not, what will happen? Assume that the expected return on T-Bills is 3.00% and on the S&P500 is 12.00%. Assume a risk-free rate of 5% and a market risk premium of 7.00%.
Homefront Mining 3.00%
Bell Computer 6.00%
Shallow Wine 3.00%
Jerk Cola 14.64%
2.What is the beta for each portfolio of assets? How do these betas relate to the betas for the individual assets in the portfolio?
3.Should portfolio concepts influence the way that investors think about the riskiness of individual stocks? Should these concepts influence the way that managers think about the riskiness of their companies?
Historical Annual Returns Homefront Bell Shallow Jerk Year T-Bills S&P 500 Mining Computer Wine Cola Mining-Computer Mining-Wine Mining-Cola Computer-Wine Computer-Cola Wine-Cola 2000 5.89% -9.11% 10.00% -5.00% 8.00% -9.00% 2.50% 9.00% 0.50% 1.50% -7.00% -0.50% 2001 3.83% -11.88% 9.00% -4.50% 7.00% -15.00% 2.25% 8.00% -3.00% 1.25% -9.75% -4.00% 2002 1.65% -22.10% 15.00% -7.50% 13.00% -10.00% 3.75% 14.00% 2.50% 2.75% -8.75% 1.50% 2003 1.02% 28.70% -20.00% 10.00% -22.00% 50.00% -5.00% -21.00% 15.00% -6.00% 30.00% 14.00% 2004 1.20% 10.87% -5.00% 2.50% -7.00% 30.00% -1.25% -6.00% 12.50% -2.25% 16.25% 11.50% Risk and Return Metrics T-Bills S&P 500 Mining Computer Wine Cola Mining-Computer Mining-Wine Mining-Cola Computer-Wine Computer-Cola Wine-Cola Reference 1 2 3 4 5 6 7 8 9 10 11 12 Mean 2.718% -0.704% 1.80% -0.900% -0.200% 9.200% 0.450% 0.800% 5.500% -0.550% 4.150% 4.500% Std. Dev. 0.019 0.182 0.128 0.064 0.128 0.260 0.032 0.128 0.070 0.032 0.161 0.070 Variance 0.000 0.033 0.016 0.004 0.016 0.068 0.001 0.016 0.005 0.001 0.026 0.005 Beta -0.051 1.000 -0.697 0.349 -0.697 1.377 -0.174 -0.697 0.340 -0.174 0.863 0.340 Varinace-Covariance Matrix for 50-50 Portfolio Homefront Bell Shallow Jerk Homefront Mining 0.016296 -0.008148 0.016296 -0.032156 Bell Computer 0.004074 -0.008148 0.016078 Shallow Wine 0.016296 -0.032156 Jerk Cola 0.067656 Correlation Matrix for 50-50 Portfolio Mining Computer Wine Cola Homefront Mining 1 -1 1 -0.968430265 Bell Computer 1 -1 0.968430265 Shallow Wine 1 -0.968430265 Jerk Cola 1 Expected Returns Expected Std. Return Dev Beta Homefront Mining 2.00% 0.13 -0.70 Shallow Wine 3.00% 0.13 -0.70 T-Bills 3.00% 0.02 -0.05 Bell Computer 6.00% 0.06 0.35 S&P 500 12.00% 0.18 1.00 Jerk Cola 14.64% 0.26 1.38 Expected Vs. Required Returns Risk-Free Rate 5.00% Market RiskPremium 7.00% Req. Ret. Exp. Ret Beta Homefront Mining 0.12% 2.00% -0.70 Shallow Wine 0.12% 3.00% -0.70 Bell Computer 7.44% 6.00% 0.35 Jerk Cola 14.64% 14.64% 1.38Explanation / Answer
Expected Return Risk free rate Market Risk Beta ER RF MRP (ER - RF)/ MRP Homefront Mining 3.00% 5.00% 7.00% (0.29) Bell Computer 6.00% 5.00% 7.00% 0.14 Shallow Wine 3.00% 5.00% 7.00% (0.29) Jerk Cola 14.64% 5.00% 7.00% 1.38
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