The table uses the standard deviation of the portfolio's return as a measure of risk. A normal random variable, such as a portfolio's return, stayswithin two standard deviations of its average approximately 95% of the time.Suppose Valerie modifies her portfolio to contain 75% diversified stocks and 25% risk-free government bonds; that is, she chooses combination D.The average annual return for this type of portfolio is 13%, but given the standard deviation of 15%, the returns will typically (about 95% of the time)vary from a gain ofto a loss of Suppose Valerie is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversifiedstocks. The following table shows the risk and return associated with different combinations of stocks and bonds.CombinationABCDEFraction of Portfolio in DiversifiedStocks(Percent)0255075100Average AnnualReturn(Percent)2.506.009.5013.0016.50As the risk of Valerie's portfolio increases, the average annual return on her portfolioStandard Deviation of Portfolio Return(Risk)(Percent)05101520Suppose Valerie currently allocates 25% of her portfolio to a diversified group of stocrises 75% of her portfolio to risk-free bonds; that is, shechooses combination B. She wants to increase the average annual return on her port falls m 6% to 13%. In order to do so, she must do which ofthe following? Check all that apply.Accept more riskSell some of her stocks and use the proceeds to purchase bondsSell some of her stocks and place the proceeds in a savings accountSell some of her bonds and use the proceeds to purchase stocks

Capital Allocation Line The Capital Allocation Line (CAL) is a graphical presentation of the various…

Suppose Valerie is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B с D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.50 6.00 9.50 13.00 16.50 As the risk of Valerie's portfolio increases, the average annual return on her portfolio_ Suppose Valerie currently allocates 25% of her portfolio to a diversified group of stoc chooses combination B. She wants to increase the average annual return on her port the following? Check all that apply. Accept more risk Sell some of her stocks and use the proceeds to purchase bonds Sell some of her stocks and place the proceeds in a savings account Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 rises 75% of her portfolio to risk-free bonds; that is, she falls m 6% to 13%. In order to do so, she must do which of

Suppose Valerie is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B с D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.50 6.00 9.50 13.00 16.50 As the risk of Valerie's portfolio increases, the average annual return on her portfolio_ Suppose Valerie currently allocates 25% of her portfolio to a diversified group of stoc chooses combination B. She wants to increase the average annual return on her port the following? Check all that apply. Accept more risk Sell some of her stocks and use the proceeds to purchase bonds Sell some of her stocks and place the proceeds in a savings account Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 15 20 rises 75% of her portfolio to risk-free bonds; that is, she falls m 6% to 13%. In order to do so, she must do which of

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 2MC

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8. Risk and return Suppose Frances is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A B с D E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 2.00 4.50 7.00 9.50 12.00 As the risk of Frances's portfolio increases, the average annual return on her portfolio Standard Deviation of Portfolio Return (Risk) (Percent) 0 Accept more risk Sell some of her bonds and use the proceeds to purchase stocks Sell some of her stocks and place the proceeds in a savings account Sell some of her stocks and use the proceeds to purchase bonds 5 10 15 20 Suppose Frances currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the average…
You decide to invest in a portfolio consisting of 21 percent Stock X, 48 percent Stock Y, and the remainder in Stock Z. Based on the following information, what is the standard deviation of your portfolio? State of Economy Normal Boom Probability of State of Economy .84 .16 Return if Stat Stock X Stock Y 10.20% 3.60% 17.50% 25.50%
If the economy booms, Meyer&Co. stock will have a return of 20.8 percent. If the economy goes into a recession, the stock will have a loss of 13.1 percent. The probability of a boom is 63 percent while the probability of a recession is 37 percent. What is the standard deviation of the returns on the stock? 9.29% 12.43% 13.56% 14.61% 14.61%
Consider an investment that pays off $700 or $1,600 per $1,000 invested with equal probability. Suppose you have $1,000 but are willing to borrow to increase your expected return. What would happen to the expected value and standard deviation of the investment if you borrowed an additional $1,000 and invested a total of $2,000? What if you borrowed $2,000 to invest a total of $3,000? Instructions: Fill in the table below to answer the questions above. Enter your responses as whole numbers and enter percentage values as percentages not decimals (.e., 20% not 0.20). Enter a negative sign (-) to indicate a negative number if necessary. Invest $1,000 Invest $2,000 Invest $3,000 Expected Value Percent Increase Standard Deviation 1150 S 28 % $ 8 % $ Expected Return N/A Doubled Tripled : #
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Asset A will generate a 20% return with probability 0.25; a 15% return with probability 0.50; and a -15% return with probability 0.25. The expected return on Asset A is % Write your answer as a percentage, rounded to 2 decimal places. Example: if the answer is 10.3478%, then write "10.35". Do not type the % sign in your answer.
Guy Fieri has purchased a significant plot of land in Northwest Ohio for his newest venture: FlavorTownship. This hub for mind-boggling flavor and entertainment is a strictly for-profit operation. Guy would like to keep Flavor Township open all year-round, but due to Ohio weather the following are the probabilities of when it will be open: |- 30% chance it is open 300 days a year |- 55% chance it is open 325 days a year |- 15% chance it is open 350 days a year Flavor Township will expect to host 14,000 people each day that it is open and expects an average revenue of $45 per visitor. This paradigm-shifting landmark will cost $420,000,000 to start the investment and will require annual costs (food, employees, etc.) of $115,000,000. Every 3 years, Flavor Township will undergo necessary maintenance that will cost $22,000,000. If the expected life of Flavor Township is 15 years and a 16% return is expected, what is the expected NPV of this project?
Q5 - Summary statistics for returns on two stocks X and Y are listed below. Mean VarianceStock X 2.85% 0.005000Stock Y 5.91% 0.006000 The covariance of returns on stocks X and Y is 0.002800. Consider a portfolio of 30% stock X and 70% stock Y. What is the variance of portfolio returns?Please round your answer to six decimal places. Note that the correct answer will be evaluated based on the full-precision result you would obtain using Excel.
A 28- year- old man pays $158 for one year life insurance policy with coverage of $110,000. If the probability he will live through the year is 0.9994, what is the expected value for the insurance policy?
Mr Phiri has K10,000 in his account. He is considering investing in a project which has 70 % probability of earning a profit of K10,000 and a 30% probability of incurring a loss of K10,000. His utility at the moment is 20 utiles with the current K10,000. With K20, 000 his utility would be 25 utiles and with K0 his utility would be zero.a) What is the expected profit of the project? b) What is the expected marginal utility of the project? Is Mr Phiri likely to invest in the project? Mr Sinkala also has K10,000 from which he derives 20 utiles. However, Mr Phiri derives 15 utiles from the profit of K10,000.c) What is the expected marginal utility for Mr Sinkala? d) How can you describe Mr Phiri and Mr Sinkala in terms of their attitude towards risk?
Mr Phiri has K10,000 in his account. He is considering investing in a project which has 70 % probability of earning a profit of K10,000 and a 30% probability of incurring a loss of K10,000. His utility at the moment is 20 utiles with the current K10,000. With K20, 000 his utility would be 25 utiles and with K0 his utility would be zero. a) What is the expected profit of the project? b) What is the expected marginal utility of the project? Is Mr Phiri likely to invest in the project? Mr Sinkala also has K10,000 from which he derives 20 utiles. However, Mr Phiri derives 15 utiles from the profit of K10,000. c) What is the expected marginal utility for Mr Sinkala? d) How can you describe Mr Phiri and Mr Sinkala in terms of their attitude towards risk?
Annual savings due to an energy efficiency project have a most likely value of $30,000.The high estimate of $40,000 has a probability of 0.2, and the low estimate of $20,000has a probability of 0.30. What is the expected value for the annual savings?