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Data analysis on several securities has revealed the following statistics

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Question;Use the following data for questions 1 through 4.Data analysis on several securities has revealed the following statistics,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 Jensen?s Alpha? (5 points)c. Construct an arbitrage portfolio and show the level of return. (15 points)2. (25 points)a. Compute;Sharpe?s 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;Treynor?s 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 Sharpe?s Index as an indicator as opposed to Treynor?s 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#47520 | Written in 18-Jul-2015

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