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Data analysis on several securities has revealed the following statistics;>> Get This Solution

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Data analysis on several securities has revealed the following statistics;2;2;Cov R A, R M 30, M 40, R M 10%, R F 4%, A 25, and R A 9.5%. F is;a riskless asset.;1.;(25 points);a.;Compute the level of systematic risk for A, A, and state whether A is more risky;than the market or less risky than the market (or the same). (5 points);b.;Use the capital asset pricing model to determine if A is correctly priced. State;whether there is an arbitrage opportunity available. If so, what is the amount of;Jensens Alpha? (5 points);c.;Construct an arbitrage portfolio and show the level of return. (15 points);2.;(25 points);a.;Compute Sharpes Index for A and for the market portfolio, M. Which of the;two assets would a risk-averse investor prefer? Explain. (10 points);b.;Compute Treynors Index for A and the market portfolio, M. Which of the;two assets would a risk-averse investor prefer? Explain. (10 points);c.;When would you use Sharpes Index as an indicator as opposed to Treynors;Index? Explain. (5 points);3.;(25 points);In question #1 the security market line was used to determine whether A was underpriced or overpriced. This question uses the capital market line.;a.;Graph the capital market line in the space below. Hint: You will have to find the;slope of the CML in order to do this. (8 points);E r;b.;Show whether A is correctly priced according to the capital market line. (8;points);c.;Explain the difference between the security market line and the capital market line;in terms of risk and return. Will the capital market line call for a higher expected;return than the security market line? (5 points);d.;State three critical assumptions that an investor makes when forming a portfolio.;(4 points);4. Compute the following;a.;Show the level of systematic risk for a portfolio formed with 25% in A;and the remainder in M. Also, show the standard deviation and expected return.;(8 points);b.;Show the level of systematic risk for a portfolio formed with 75% in A;and the remainder in M. Also, show the standard deviation and expected return.;(8 points);c.;Which of the two portfolios do you prefer? Note: You must analyze this;choice in the context of risk and return. (5 points);d.;Provide four of the assumptions underlying the capital market line (CML);and security market line (SML). (4 points)

 

Paper#23939 | Written in 18-Jul-2015

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