result is that the systematic risk (beta) of the average Hong Kong stock from a U.S. perspective is only 0.85, compared with a beta of 1.0 for the average U.S. stock. In other words, diversifying into Hong Kong stocks will reduce the riskiness of a portfolio currently concentrated in U.S. stocks. 2. What characteristics of foreign securities lead to diversification benefits for American investors? ANSWER. The two basic characteristics are: a) Many foreign securities are issued by companies
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CHAPTER 2 RISK AND RETURN: PART I (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: (2.2) Payoff matrix Answer: a Diff: E [i]. If we develop a weighted average of the possible return outcomes, multiplying each outcome or "state" by its respective probability of occurrence for a particular stock, we can construct a payoff matrix of expected returns. a. True b. False (2.2) Standard deviation Answer: a Diff: E [ii]. The tighter the probability
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Alex Sharpe’s Portfolio 1. Returns and Risk Estimate and compare the returns and variability (i.e. annual standard deviation over the past five years) of Reynolds and Hasbro with that of the S&P 500 Index. Which stock appears to be riskiest? S&P: Monthly average return=0.57% Annual return= 6.89% Annual SD= 12.477% (monthly SD 3.60* 3.46 (square of 12)) Reynolds: Monthly average return= 1.87% Annual return= 1.87% * 12= 22.50% Annual SD: 32.446% (monthly SD 9.37* 3.46 (square of
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MSc Corporate Finance Dr. Kirak Kim Before we start Main branches of finance Corporate Finance How do we value projects and (optimally) finance them? Asset Pricing How do we price securities more precisely? What’s the difference? Is it a Corporate Finance question or an Asset Pricing question? □ You are the manager of Intel Corp. You are reviewing the proposal for the new plant to be built in China. The new plant requires a large onetime investment but will provide significant
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deviations because the coefficient of variation considers the relative size of the expected returns of each investment. E8-4. Computing the expected return of a portfolio Answer: rp (0.45 0.038) (0.4 0.123) (0.15 0.174) (0.0171) (0.0492) (0.0261 0.0924 9.24% The portfolio is expected to have a return of approximately 9.2%. E8-5. Calculating a portfolio beta Answer: Beta (0.20 1.15) (0.10 0.85) (0.15 1.60) (0.20 1.35) (0.35 1.85) 0.2300 0.0850 0.2400 0.2700 0.6475 1.4725 E8-6. Calculating the required rate
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the “risk-free” rate of return Portfolio Risk • Portfolio – a collection or grouping of investment securities or assets • Efficient Portfolio 1) Maximize return for a given level of risk 2) Minimize risk for a given level of return • Portfolio Return … the expected return on a portfolio, kp, is the weighted average of the expected returns on the individual stocks in the portfolio … the portfolio weights must sum to 1.0 … the realized rate
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CONTENTS BONDS 1 STOCKS 6 OPTIONS 10 FUTURES 16 PORTFOLIO PERFORMANCE EVALUATION 20 INTERNATIONAL INVESTING 26 BONDS Page 480 –CFA Problems Questions #1 1. Leaf Products may issue a 10-year maturity fixed-income security, which might include a sinking fund provision and either refunding or call protection. a) Describe a sinking fund provision. The sinking fund provision allows the firm to repurchase a fraction of the outstanding bonds at either the market price or the sinking
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10/2011 The Main Steps of the Theory Building • Portfolio Selection (Markowitz, 1952) • CAPM (Sharpe, 1963) • Financing and Dividend Decisions Neutrality (Modigliani et Miller, 1958, 1961,1963) • Efficient Markets (Fama, 1965, 1970) • Options Pricing Theory (Black & Scholes, 1973, Myers, 1977) • Agency Theory (Jensen, Meckling, 1976) • Efficient Markets II (Fama, 1991) • Behavioural Finance (Kahneman & Tversky, 1979, Shiller, 1981, 2000) Portfolio Selection • Investors are rationals and risk averse
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‘ Investment Analysis & Portfolio Management Sharpe’s Single Index Model Practice Sheet -2 | |1. Betas of two stocks are 0.73 and 1.20 respectively. If the standard deviation of the market returns is 15.49%, the covariance between | | | |the two stock’s return is | | | |(a) 175.20(%)2 (b) 210.20(%)2 (c) 288.20(%)2 (d) 328.76(%)2 (e) 345.60(%)
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calculations. I also compared the result to the earlier analysis done based on average return, standard deviation and beta. Sharpe ratio, measures investment performance of the portfolio compared to risk taken. It’s most appropriate to use when evaluating diversified portfolios. Sharpe ratio penalizes non-diversified portfolios by also taking into account unsystematic risk. The high sharpe ratio represents the better performance for taking on additional risk. Wallflower Value Fund (WVF) shows the
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