Reference no: EM13850396
Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. The standard deviation of stock returns is 36.00% and the standard deviation of bond returns 11.50%. The stock, bond and risk-free returns are all uncorrelated.
1. What is the expected return on the mutual fund?
2. What is the standard deviation of returns for the mutual fund?
Now, assume the correlation between stock and bond returns is 0.40 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction, correlations with the risk-free asset are always zero).
3. What is the standard deviation of returns for the mutual fund? Is it higher or lower than the standard deviation found in part 2? Why?
Now, assume that the standard deviation of the mutual fund portfolio is exactly 26.50% per year and a potential customer has a risk-aversion coefficient of 2.50.
4. What correlation between the stock and bond returns is consistent with this portfolio standard deviation?
5. What is the optimal allocation to the risky mutual fund (the fund with exactly 26.50% standard deviation) for this investor?
6. What is the expected return on the complete portfolio?
7. What is the standard deviation of the complete portfolio?
8. What is the Sharpe ratio of the complete portfolio?
|
After-tax cost of capital to for bond-after-tax cost of debt
: (Cost of debt) The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1,000 par value bonds with a 15-year maturity at a price of $948 that carries a coupon interest rate of 12..
|
|
What is the difference between creativity and innovation
: What is the difference between Creativity and Innovation
|
|
Outstanding bonds with a coupon rate
: TC, Inc. has 15 million of outstanding bonds with a coupon rate of 10 percent. the yield to maturity on these bonds is 12.5 percent. if the firms tax rate is 30 percent, what is relevant cost of debt financing to Kendall, inc.?
|
|
Appropriate than person-focused pay programs
: Person-focused pay is becoming more prevalent in companies; however, person-focused pay programs are not always an appropriate basis for compensation. What conditions under which incentive pay is more appropriate than person-focused pay programs?
|
|
What is the expected return on the mutual fund
: Consider the following capital market: a risk-free asset yielding 1.00% per year and a mutual fund consisting of 65% stocks and 35% bonds. The expected return on stocks is 11.75% per year and the expected return on bonds is 4.25% per year. What is th..
|
|
Make annual deposits-what is the future value
: You are planning to make annual deposits of $5,850 into a retirement account that pays 8 percent interest compounded monthly. How large will your account balance be in 25 years? What is the Future Value?
|
|
Calculate the initial value of index-value-weighting scheme
: The following three defense stocks are to be combined into a stock index in January 2013 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance). Assume the index is scaled by a factor of 10 million..
|
|
Contrast theories of frederick w taylor and elton mayo
: Compare and contrast theories of Frederick W Taylor and Henri Fayol and compare and contrast theories of Frederick W Taylor and Elton Mayo
|
|
Some examples of simple jobs in these organizations
: What are some examples of simple jobs in these organizations? What makes them simple? How do these jobs relate to the organization's Business Unit Strategy
|