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What is the return on the market portfolio if the risk-free rate is 5.3 percent. If a stock has a beta of 1.8 and a required rate of return of 12.0 percent and the market is in equilibrium?
In a market in equilibrium, the Capital Asset Pricing Model (CAPM) can be used to determine the return on the market portfolio. The formula is given by: [ R_m = R_f + \beta(R_m - R_f) ] Where ( R_m ) is the return on the market portfolio, ( R_f ) is the risk-free rate, and ( \beta ) is the stock's beta. Given the risk-free rate of 5.3 percent and a stock with a beta of 1.8 and a required return of 12.0 percent, we can rearrange the formula to solve for ( R_m ). Solving yields ( R_m ) = 11.5 percent, indicating the market portfolio's return.
Is the market portfolio the efficient portfolio?
Yes, the market portfolio is considered the efficient portfolio in the context of the Capital Asset Pricing Model (CAPM). It is the portfolio that contains all risky assets in the market, weighted by their market values, and lies on the efficient frontier, offering the highest expected return for a given level of risk. Investors holding the market portfolio achieve optimal diversification, thereby minimizing risk while maximizing returns. Hence, it represents the best possible investment strategy in a well-functioning market.
Explain why a characteristic of an efficient market is that investments in that market have zero NPVs?
On average, the only return that is earned is the required return-investors buy assets with returns in excess of the required return (positive NPV), bidding up the price and thus causing the return to fall to the required return (zero NPV); investors sell assets with returns less than the required return (negative NPV), driving the price lower and thus the causing the return to rise to the required return (zero NPV).
What is capital allocation line?
The capital allocation line (CAL) represents the risk-return trade-off of a portfolio that combines a risk-free asset and a risky asset or portfolio of assets. It is a graphical line that shows the expected return of a portfolio against its risk, measured by standard deviation. The slope of the CAL indicates the risk premium per unit of risk, helping investors determine the optimal mix of risk-free and risky investments to achieve their desired return. The point where the CAL is tangent to the efficient frontier represents the optimal risky portfolio.
What is the difference between the required rate of return and the expected rate of return in investment analysis?
The required rate of return is the minimum return an investor needs to justify the risk of an investment, while the expected rate of return is the return that an investor anticipates receiving based on their analysis of the investment's potential performance.
How can he return and standard deviation of a portfolio be determined?
How can the return and standard deviation of a portfolio be deteremined
What is the return on the market portfolio if the risk-free rate is 5.3 percent. If a stock has a beta of 1.8 and a required rate of return of 12.0 percent and the market is in equilibrium?
In a market in equilibrium, the Capital Asset Pricing Model (CAPM) can be used to determine the return on the market portfolio. The formula is given by: [ R_m = R_f + \beta(R_m - R_f) ] Where ( R_m ) is the return on the market portfolio, ( R_f ) is the risk-free rate, and ( \beta ) is the stock's beta. Given the risk-free rate of 5.3 percent and a stock with a beta of 1.8 and a required return of 12.0 percent, we can rearrange the formula to solve for ( R_m ). Solving yields ( R_m ) = 11.5 percent, indicating the market portfolio's return.
Model test paper of ncfm investment analysis and portfolio management?
A portfolio comprises of two stock A and B. Stock A gives a return of 9% and Stock B gives a return of 6%. Stock A has a weight of 60% in the portfolio. What is the portfolio return?
What is a dominant portfolio?
Dominant Portfolio is part of the efficient frontier in modern porfolio theory. If a portfolio has a higher expected return than another portfolio with the same level of risk, a lower level of expected risk than another portfolio with equal expected return or a higher expected return and lower expected risk than the the portfolio is dominant.
How do you perform an average rate of return calculation for an investment portfolio?
To calculate the average rate of return for an investment portfolio, you add up the returns of all the investments in the portfolio over a specific period of time and then divide that total by the number of investments. This gives you the average rate of return for the portfolio.
The CAPM implies that investors require a higher return to hold highly volatile securities?
The CAPM relates the expected return on a security to that of the overall market portfolio. A highly volatile security will have a high covariance with the market portfolio. Since beta equals the covariance of the security with the market portfolio divided by the variance of the market portfolio, the result is a high value of beta. When this high value of beta is plugged into the CAPM formula, all else not changed, the required return on the security (ra) is going to increase, implying investors require a higher return to hold a highly volatile security. t
What is the personalized rate of return for my investment portfolio?
The personalized rate of return for your investment portfolio is the percentage increase or decrease in the value of your investments over a specific period, taking into account the individual assets and their performance in your portfolio.
What rate of return on a security to the expected rate of return on a portfolio?
The rate of return on a security is typically compared to the expected rate of return on a portfolio to assess its contribution to overall portfolio performance. If the security's rate of return exceeds the portfolio's expected rate, it may be considered a good investment; conversely, if it falls short, it might detract from overall returns. Investors often use metrics like the Sharpe ratio to evaluate the risk-adjusted return of individual securities relative to the portfolio. This comparison helps in making informed investment decisions and optimizing asset allocation.
10000 to invest in a stock portfolio. stock A expected return 18 and stock B expected return 11. create a portfolio with expected return of 16.25. how much to invest in stock A and stock B?
6000.00
Sharpex index model of optimum portfolio with examples?
The Sharpe Index Model, also known as the Capital Asset Pricing Model (CAPM), is used to find the optimal portfolio by balancing risk and return. It measures the excess return of a portfolio compared to a risk-free rate per unit of risk (beta). An example would be constructing a portfolio of diversified assets that maximizes return for a given level of risk, based on the relationship between the portfolio's expected return, the risk-free rate, and the market risk premium.
How to calculate the expected return and volatility for a portfolio of stocks?
To calculate the expected return of a portfolio of stocks, multiply the expected return of each stock by its respective weight in the portfolio and sum these values. For volatility, first determine the covariance between the stock returns, then use these covariances along with the weights to compute the portfolio's variance, which is the sum of the weighted variances and covariances. Finally, take the square root of the variance to obtain the portfolio's volatility. This process involves using statistical measures such as the mean return and standard deviation of individual stock returns.
what is the expected portfolio return on a portfolio comprised of 25% h stock and 75% l stock?
As a well-informed investor, you naturally want to know the expected return of your portfolio—its anticipated performance and the overall profit or loss it's racking up. Expected return is just that: expected. It is not guaranteed, as it is based on historical returns and used to generate expectations, but it is not a prediction. The expected return of a portfolio will depend on the expected returns of the individual securities within the portfolio on a weighted-average basis. A well-diversified portfolio will therefore need to take into account the expected returns of several assets. KEY TAKEAWAYS To calculate a portfolio's expected return, an investor needs to calculate the expected return of each of its holdings, as well as the overall weight of each holding. The basic expected return formula involves multiplying each asset's weight in the portfolio by its expected return, then adding all those figures together. In other words, a portfolio's expected return is the weighted average of its individual components' returns. The expected return is usually based on historical data and is therefore not guaranteed. The standard deviation or riskiness of a portfolio is not as straightforward of a calculation as its expected return. How to Calculate Expected Return To calculate the expected return of a portfolio, the investor needs to know the expected return of each of the securities in their portfolio as well as the overall weight of each security in the portfolio. That means the investor needs to add up the weighted averages of each security's anticipated rates of return (RoR). An investor bases the estimates of the expected return of a security on the assumption that what has been proven true in the past will continue to be proven true in the future. The investor does not use a structural view of the market to calculate the expected return. Instead, they find the weight of each security in the portfolio by taking the value of each of the securities and dividing it by the total value of the security. Once the expected return of each security is known and the weight of each security has been calculated, an investor simply multiplies the expected return of each security by the weight of the same security and adds up the product of each security. Formula for Expected Return Let's say your portfolio contains three securities. The equation for its expected return is as follows: Ep = w1E1 + w2E2 + w3E3 where: wn refers to the portfolio weight of each asset and En its expected return.
