A portfolio that combines the risk-free asset and the market portfolio has an expected return of 9% and a standard deviation of 13%.
The risk-free rate is 5% and the expected return on the market portfolio is 14%.
Assume that the CAPM holds in that market!
What expected return should a security earn if it has a 0.53 correlation with the market portfolio and a standard deviation of 61%?
Introduction to Portfolio Theory: Part 18 Medium ðŸ§
Could you answer the following questions correctly?
-According to the CAPM, can a stock have a negative expected return?
-Why would you invest in a risky security with an expected return that is lower than the risk-free rate?
-Can a security have a low beta and a high standard deviation?
-What would you say about the expected return on a security with low beta and high SD?
Introduction to Portfolio Theory: Part 17 Medium ðŸ§
Calculate the expected return on Walmart stock, using CAPM!
Rely on the publicly available information to calculate the necessary input values!
1-Y US Treasury bill will be the proxy for the risk-free asset.
The relevant market will be S&P 500!
Use the information for the last 3 years!
Introduction to Portfolio Theory: Part 16 Hard ðŸ§
Calculate beta of the Amazon public stock! Use publicly available data and rely on the information for the last 3 years.
The relevant market will be NASDAQ.
Can you estimate the beta without calculating it exactly?
Using the results of your calculation, explain what beta means and compare the value you calculated with the values publicly available for the Amazon stock (are they the same or different and why?)!
Introduction to Portfolio Theory: Part 15 Medium ðŸ§
1. What sort of investor rationally views the variance of an individual security’s return as the security’s proper measure of risk?
What is the risk of the portfolio for this investor?
2. What sort of investor rationally views the beta of a security as the security’s proper measure of risk?
What is the risk of the portfolio for this investor?
Consider the following possible returns both on the stock of Transformers Optimus, Inc., and on the market:
Assume that each state is equally likely to occur! Plot the characteristic line of the stock Transformers Optimus and calculate the slope of the characteristic line!
Plot the feasible set of the portfolios consisting of a risky portfolio (defined as Portfolio R) consisting of 35% of AT&T, 40% of Ford, and 25% of Dell public stocks and a risk-free asset, which is the 1-Y US Treasury Bill in this case.
Show the points of the portfolios of 70% in the risk-free asset and the rest in Portfolio R, 35% in risk-free asset and the rest in Portfolio R, and a riskless borrowing case in which you borrow 40% of your original capital and combine the amount borrowed with your original capital to invest solely in Portfolio R.
Also investigate the feasible set of portfolios for which you borrow at 7% and invest all your funds in the Portfolio R, together with the case in which you borrow 40% and invest all your funds in Portfolio R.
For the risk-free asset, use the info on 5th of February, 2024 and for the stocks, use the info for the last 3 years to estimate the necessary input values.
