Your portfolio has three asset classes. U.S.

government​T-bills account for ​

% of the​portfolio, large-company stocks constitute another ​%, and​small-
company stocks make up the remaining ​%. If the expected returns are ​%
for the​T-bills, ​% for the​large-company stocks, and ​% for the​small-
company stocks, what is the expected return of the​portfolio?

Weight of T-bills 48%

Expected returns of T-bills 2.27%
Weight of large company stocks 36%
Expected returns of large company stocks 9.23%
Weight of small company stocks 16%
Expected returns of small company stocks 15.03%

Expected return of portfolio 6.82%

Risk preferences Investment 1 has a ​% chance of paying ​$ and a ​% chance of paying ​$.
Investment 2 has a ​% chance of paying ​$ and a ​% chance of paying ​$. Both investments cost ​$
today.
a. What is the expected value of the payment that each investment will​make, not counting
the initial​cost?
b. What is the expected return for each​investment?
c. Which investment does a​risk-seeking investor​prefer?
d. Which investment does a​risk-neutral investor​prefer?
e. Which investment does a​risk-averse investor​prefer?

Both investments cost

Investment 1
Investment 1
Investment 2
Investment 2

Expected value of the payment that Investment 1 will make

Expected value of the payment that Investment 2 will make

Expected return of investment 1

Expected return of investment 2
 205

Payout Probability
150 0.5 75
300 0.5 150
50 0.5 25
400 0.5 200

225
225

9.76%
9.76%
Portfolio weights You have a small portfolio of fast food restaurants consisting of
Chipotle ​(​), McDonalds ​(​), Shake Shack ​(​), and​Wendy's ​(​). Use the following​
information, LOADING...​, to answer the questions.
a. How much do you have invested in each​stock?
b. What is the total value of your​portfolio?
c. What are the security weights for your​portfolio?

Ticker Price
CMG 904.82
MCD 166.14
SHAK 50.99
WEN 19.56
Shares Amount invested Weight
19 17191.58 76.27%
14 2325.96 10.32%
42 2141.58 9.50%
45 880.2 3.91%
Total value of portfolio 22539.32
Portfolio return and standard deviation Jamie Wong is thinking of building an
investment portfolio containing two exchange traded funds​(ETFs). Jamie plans to
invest ​$ in Vanguard​S&P 500 ETF ​(​) and ​$ in Invesco QQQ Trust ​(​). Jamie has decided
to analyze some historical returns to get a sense for her​portfolio's possible future risk
and return. Six years of historical annual returns for each ETF are shown in the
following​table: LOADING....
a. Calculate the portfolio​return, ​, for each of the 6 years assuming that ​% is
invested in and ​% is invested in .
b. Calculate the average annual return for each ETF and the portfolio over the​six-
year period.
c. Calculate the standard deviation of annual returns for each ETF and the portfolio.
How does the portfolio standard deviation compare to the standard deviations of the
individual​ETFs?
d. Calculate the correlation coefficient for the two ETFs. How would you
characterize the correlation of returns of the two​ETFs?
e. Discuss any likely benefits of diversification achieved by Jamie through creation of
the portfolio.

2014
2015
2016
2017
2018
2019

Invested in VOO
Invested in QQQ

VOO return over the 6-year period

QQQ return over the 6-year period
Average return of the portfolio over the​6-year period

Standard deviation of VOO returns over the 6-year period

Standard deviation of QQQ returns over the 6-year period
Standard deviation of the portfolio returns over the​6-year period

Correlation coefficient between VOO and QQQ

VOO return (%) QQQ return (%) Portfolio Return
13.39 18.79 16.90
2.71 9.18 6.92
11.78 6.42 8.30
21.49 33.49 29.29
-3.52 -1.16 -1.99
31.99 39.68 36.99

35%
65%

12.97
17.73
16.07

12.75
16.06
14.72

0.94
 Portfolio analysis You have been given the expected return data shown in the
first table on three assets ​F, G, and H over the period ​-​: LOADING....
Using these​assets, you have isolated the three investment alternatives shown in the
following​table: LOADING....
a. Calculate the average return over the​4-year period for each of the three
alternatives.
b. Calculate the standard deviation of returns over the​4-year period for each of
the three alternatives.
c. Use your findings in parts a and b to calculate the coefficient of variation for
each of the three alternatives.
d. On the basis of your​findings, which of the three investment alternatives do
you think performed better over this​period? ​Why?

Year
2016
2017
2018
2019

Alternative
1
2
3

a. Period
Alternative 1 investment into asset F

Expected return of Alternative 1 over the 4-year period

Period
Alternative 2 investment into asset F
Alternative 2 investment into asset G

Expected return of Alternative 2 over the 4-year period

Period
Alternative 2 investment into asset F
Alternative 2 investment into asset H

Expected return of Alternative 3 over the 4-year period

b. Standard deviation of returns over the​4-year period for alternative 1

Standard deviation of returns over the​4-year period for alternative 2
Standard deviation of returns over the​4-year period for alternative 3
Coefficient of variation for alternative 1
Coefficient of variation for alternative 2
Coefficient of variation for alternative 3
 Historical Return
Asset F Asset G Asset H
15 16 13
16 15 14
17 14 15
18 13 16

Investment
100% of asset F
50% of asset F and 50% of asset G
50% of asset F and 50% of asset H

4
100%

16.5

4
50%
50%

15.50

4
50%
50%

15.50

1.29
0.00
1.29
0.078
0.000
0.083
Portfolio efficiency Is a portfolio that provides the minimum standard deviation
for any level of expected return​efficient?
Portfolio efficiency The following​table, LOADING...​, provides the
expected return and standard deviation for four portfolios. Plot each​
portfolio's risk-return combination on a graph and identify which are the
efficient versus inefficient portfolios.
​ orrelation, risk, and return
C Matt Peters wishes to evaluate the risk and return
behaviors associated with various combinations of assets V and W under three
assumed degrees of​correlation: perfectly​positive, uncorrelated, and perfectly
negative. The expected return and standard deviations calculated for each of the
assets are shown in the following​table: LOADING....
a. If the returns of assets V and W are perfectly positively correlated​(correlation
coefficient​1), describe the range of​(1) expected return and​(2) standard deviation
associated with all possible portfolio combinations.
b. If the returns of assets V and W are uncorrelated​(correlation coefficient​0),
describe the approximate range of​(1) expected return and​(2) standard deviation
associated with all possible portfolio combinations.
c. If the returns of assets V and W are perfectly negatively correlated​(correlation
coefficient​1), describe the range of​(1) expected return and​(2) standard deviation
associated with all possible portfolio combinations.

V
W
Expected return (%) Standard deviation (%)
8 14
10 18
You wish to calculate the risk level of your portfolio based on its beta. The five stocks in the
portfolio with their respective weights and betas are shown in the following​table: LOADING....
Calculate the beta of your portfolio.

Stock
Apple
Intel
IBM
Microsoft
Qualcomm

Beta of portfolio
Portfolio weight (%) Beta Weight * Beta
18 1.11 0.1998
14 0.95 0.133
11 1.57 0.1727
10 1.27 0.127
47 1.82 0.8554

1.4879
a.

b.
a. Calculate the required rate of return for an asset that has a beta of ​, given a​risk-free rate of ​% and a
market return of ​%.
b. If investors have become more​risk-averse due to recent geopolitical​events, and the market return
rises to ​%, what is the required rate of return for the same​asset?

bj
RF
rM

rj

bj
RF
rM

rj
 0.54
4.7%
8.8%

6.91%

0.54
4.7%
12.3%

8.80%
T​ otal, nondiversifiable, and diversifiable risk David Talbot randomly selected securities
from all those listed on the New York Stock Exchange for his portfolio. He began with a single
security and added securities one by one until a total of 20 securities were held in the portfolio.
After each security was​added, David calculated the portfolio standard​deviation, . The
calculated values are shown in the following​table: LOADING....
a. Plot the data from the table on a graph that has the number of securities on the x​-axis
and the portfolio standard deviation on the y​-axis.
b. Divide the total portfolio risk in the graph into its nondiversifiable and diversifiable risk​
components, and label each of these on the graph.
c. Describe which of the two risk components is the relevant​risk, and explain why it is
relevant. How much of this risk exists in David​Talbot's portfolio?

Number of securities
1
2
3
4
5
6
7
8
9
10

Number of securities
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Portfolio risk, σrp Number of securities Portfolio risk, σrp
18.2 11 7.7
16.5 12 7.1
14.9 13 6.5
13.3 14 6
12.3 15 5.7
11.5 16 5.5
10.7 17 5.3
10.1 18 5.25
9.3 19 5.2
8.6 20 5.15

Portfolio risk, σrp

18.2
16.5
14.9
13.3
12.3
11.5
20
10.7
18
10.1
16
9.3
8.6 14
Portfolio Risk

7.7 12
7.1 10
6.5 8
6 6
5.7 4
5.5 2
5.3
0
5.25 0 5 10 15 20 25
5.2 Number of Securities in Portfolio
5.15
Graphical derivation of beta A firm wishes to estimate graphically the betas for two​assets, A and B.
It has gathered the return data shown in the following table for the market portfolio and for both assets
over the last 10​years, ​-​: LOADING....
a. Which of the following graphs represents the graphical derivation of beta for assets A and​B?
b. Use the characteristic lines from part a to estimate the betas for assets A and B.
c. Use the betas found in part b to comment on the relative risks of assets A and B.

Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

SUMMARY OUTPUT

Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

ANOVA

Regression
Residual
Total

Intercept
Market portfolio

Beta estimates for assets A and​B

 Annual return 30
Market portfolio Asset A Asset B
25
16 28 19
13 22 15 20
7 14 16

Asset Return (%)

15
14 18 9
12 20 13 10
-5 -2 -5
5
-9 2 0
-12 -8 -2 0
-15 -10 -5 0 5 10 15 20
4 9 6
-5
8 13 10
-10
Market Return (%)
 0.964897594077
0.931027367056
0.922405787938
3.168432850013
10

df SS MS F Significance F
1 1084.088 1084.088 107.988 6.367E-06
8 80.31173 10.03897
9 1164.4

Coefficients Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%

Upper 95.0%
6.371278458844 1.121191 5.6826 0.000464 3.785808 8.956749 3.785808 8.956749
1.089316987741 0.104825 10.39173 6.367E-06 0.847589 1.331045 0.847589 1.331045

(1.089,0.719)
 10 15 20

%)

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.886989
R Square 0.78675
Adjusted R 0.760094
Standard E 4.002216
Observatio 10

ANOVA
df SS MS F Significance F
Regression 1 472.7581 472.7581 29.51467 0.000621
Residual 8 128.1419 16.01773
Total 9 600.9

Coefficients
Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%
Upper 95.0%
Intercept 4.64711 1.416236 3.281312 0.011166 1.381265 7.912955 1.381265 7.912955
Market por 0.719352 0.132411 5.432741 0.000621 0.414013 1.024691 0.414013 1.024691
Upper 95.0%
Graphical derivation and interpreting beta You are analyzing the performance of two
stocks as shown in the following​graphs: LOADING.... The​first, shown in Panel​A, is Cyclical
Industries Incorporated. Cyclical Industries makes machine tools and other heavy​equipment,
the demand for which rises and falls closely with the overall state of the economy. The second​
stock, shown in Panel​B, is Biotech Cures Corporation. Biotech Cures uses biotechnology to
develop new pharmaceutical compounds to treat incurable diseases. ​Biotech's fortunes are
driven largely by the success or failure of its scientists to discover new and effective drugs. Each
data point on the graph shows the monthly return on the stock of interest and the monthly
return on the overall stock market. The lines drawn through the data points represent the
characteristic lines for each security.
a. Which stock do you think has a higher standard​deviation? ​Why?
b. Which stock do you think has a higher​beta? ​Why?
c. Which stock do you think is​riskier? What does the answer to this question depend​on?
Interpreting beta A firm wishes to assess the impact of changes in the market
return on an asset that has a beta of .
a. If the market return increased by ​%, what impact would this change be
expected to have on the​asset's return?
b. If the market return decreased by ​%, what impact would this change be expected
to have on the​asset's return?
c. If the market return did not​change, what​impact, if​any, would be expected on
the​asset's return?
d. Would this asset be considered more or less risky than the​market?

Beta 0.9
Market return 16%

Impact on assets return 14.4%

Market return -6%

Impact on assets return -5.4%

Impact on assets return if the market return did not change 0.0%
Betas Answer the questions below for assets A to D shown in the​table:
LOADING....
a. What impact would a ​% increase in the market return be expected to have on
each​asset's return?
b. What impact would a ​% decrease in the market return be expected to have on
each​asset's return?
c. If you believed that the market return would increase in the near​future, which
asset would you​prefer?
d. If you believed that the market return would decrease in the near​future, which
asset would you​prefer?

Asset Beta
A 0.1
B 1.5
C -0.5
D 1.1

Market return 15%

Impact to the return of asset A 1.5%

Impact to the return of asset B 22.5%
Impact to the return of asset C -7.5%
Impact to the return of asset D 16.5%

Market return -5%

Impact to the return of asset A -0.5%

Impact to the return of asset B -7.5%
Impact to the return of asset C 2.5%
Impact to the return of asset D -5.5%
Betas and risk rankings Personal Finance Problem You are considering
three stocks ​A, B, and C for possible inclusion in your investment portfolio. Stock A
has a beta of ​, stock B has a beta of ​, and stock C has a beta of .
a. Rank these stocks from the most risky to the least risky.
b. If you believed that the stock market was getting ready to experience a
significant​decline, which stock should you add to your​portfolio?
c. If you anticipated a major stock market​rally, which stock would you add to
your​portfolio?

Stock A Beta 1.3

Stock B Beta 0.7
Stock C Beta -0.2
Portfolio betas Personal Finance Problem Rose Berry is attempting to evaluate two
possible​portfolios, which consist of the same five assets held in different proportions. She is
particularly interested in using beta to compare the risks of the​portfolios, so she has gathered
the data shown in the following​table: LOADING....
a. Calculate the betas for portfolios A and B.
b. Compare the risks of these portfolios to the market as well as to each other. Which
portfolio is more​risky?

Asset
1
2
3
4
5

Beta for portfolio A

Beta for portfolio B
 Portfolio weights
Asset beta Portfolio A Portfolio B Portfolio A weight * Beta Portfolio B weight * Beta
1.79 15 20 0.2685 0.358
0.94 35 15 0.329 0.141
1.57 5 25 0.0785 0.3925
1.61 15 15 0.2415 0.2415
0.88 30 25 0.264 0.22

1.1815
1.3530
Capital asset pricing model​(CAPM) For the asset shown in the following​table,
use the capital asset pricing model to find the required return. ​(Click on the icon
here in order to copy the contents of the data table below into a​spreadsheet.)
​Risk-free
​rate,
Market
​return,
​Beta, b
​%
​%

Risk-free rate, RF
7%

rj
Market return, rm Beta, b
13% 1.7

17.2%
Beta coefficients and the capital asset pricing model Personal Finance Problem
Katherine Wilson is wondering how much risk she must undertake to generate an acceptable
return on her porfolio. The​risk-free return currently is ​%. The return on the overall stock
market is ​%. Use the CAPM to calculate how high the beta coefficient of​Katherine's portfolio
would have to be to achieve a portfolio return of ​%.

RF
rM
rj

bj
 5%
10%
20%

3.0000
 Manipulating CAPM Use the basic equation for the capital asset pricing model ​(CAPM​) to
work each of the following problems.
a. Find the required return for an asset with a beta of when the​risk-free rate and market
return are ​% and ​, respectively.
b. Find the ​risk-free rate for a firm with a required return of ​% and a beta of when the
market return is .
c. Find the market return for an asset with a required return of ​% and a beta of when the​
risk-free rate is .
d. Find the beta for an asset with a required return of ​% when the​risk-free rate and market
return are ​% and ​, respectively.

a. bj
rM
RF

rj

b. rj
bj
rM

RF

c. rj
bj
RF

rM

d. rj
RF
rM

bj
 0.27
17%
10%

11.89%

17.293%
1.73
12%

4.75%

8.941%
1.21
3%

7.91%

17.912%
8%
13.9%

1.68
Portfolio return and beta Personal Finance Problem Jamie Peters invested ​$ to set up
the following portfolio one year​ago: LOADING....
a. Calculate the portfolio beta on the basis of the original cost figures.
b. Calculate the percentage return of each asset in the portfolio for the year.
c. Calculate the percentage return of the portfolio on the basis of original​cost, using income
and gains during the year.
d. At the time Jamie made his​investments, investors were estimating that the market
return for the coming year would be . The estimate of the​risk-free rate of return averaged for
the coming year. Calculate an expected rate of return for each stock on the basis of its beta and
the expectations of market and​risk-free returns.
e. On the basis of the actual​results, explain how each stock in the portfolio performed
differently relative to those​CAPM-generated expectations of performance. What factors could
explain these​differences?

Asset
A
B
C
D
Total

Portfolio beta

Return on assets of A
Return on assets of B
Return on assets of C
Return on assets of D

rportfolio

rM
RF

rj of asset A
rj of asset B
rj of asset C
rj of asset D

P8-33 (similar to)

Cost Beta at purchase Yearly income Value today Weight Weight *Beta
39,000 0.83 1,000 39,000 0.319672 0.265328
31,000 0.91 1,300 32,000 0.254098 0.23123
36,000 1.48 0 42,500 0.295082 0.436721
16,000 1.32 275 16,500 0.131148 0.173115
122,000 2,575 130,000 1.106393

1.11

2.56%
7.42%
18.06%
4.84%

8.67%

10%
3%

8.81%
9.37%
13.36%
12.24%
 Security market line​(SML) Assume that the​risk-free rate, ​, is currently ​% and that the
market​return, ​, is currently ​%.
a. Calculate the market risk premium.
b. Given the previous​data, calculate the required return on asset A having a beta of and
asset B having a beta of .

a. RF
rM

Market risk premium

b. bj of asset A

rj of asset A

c. bj of asset B

rj of asset B
 4%
12%

8%

0.3

6.4%

1.4

15.2%