Question

7.

Assume that security returns are generated by the single-index model,

Ri = αi + βiRM + ei

where Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 3%. Suppose also that there are three securities A, B, and C, characterized by the following data:

Security	βi	E(Ri)	σ(ei)
A	0.9	8%	17%
B	1.3	12	8
C	1.7	16	11

a.	If σM = 12%, calculate the variance of returns of securities A, B, and C. (Do not round intermediate calculations. Round your answers to the nearest whole number.)

	Variance
Security A	?
Security B	?
Security C	?

b.

Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number. Omit the "%" sign in your response.)

	Mean	Variance
Security A	% ?	?
Security B	?	?
Security C	?	?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

- 2x 505 506 ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General Ea Copy Fill Paste BI U D- DA Merge & Center - $ % , :.: Conditional Format Cell Format Painter Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing HZ501 fax HP HQ HR H S HT HU HV HW HX HY HZ IA 501 502 503 total variance of security = (standard deviation of security)^2= (beta)^2(standard deviation of market)^2 + (standard deviation of error term)^2 504 total variance of A = (0.9^2 * 12^2) + 17^2 = 406 total variance of B = (1.3^2 * 1242) + 8^2 = 307 total variance of C= (1.742 +1242) + 11^2 = 507 508 IF THERE ARE INFINITE NUMBER OF ASSETS WITH RETURN CHARACTERISITICS IDENTICAL TO THOSE OF A,B & C 509 THE PORTFOLIO CONSISTS OF A SECURITIES WILL HAVE MEAN OF 8 & VARIANCE EQUAL TO (0.9^2 * 12^2) = 117 510 THE PORTFOLIO CONSISTS OF B SECURITIES WILL HAVE MEAN OF 12 & VARIANCE EQUAL TO (1.342 * 12^2) = 243 511 THE PORTFOLIO CONSISTS OF C SECURITIES WILL HAVE MEAN OF 16 & VARIANCE EQUAL TO (1.7^2 * 12^2) = 416 512 SECURITY MEAN WILL BE SAME AS THAT OF INDIVIDUAL ASSET VARIANCE 514 515 243 416 517 537 513 117 516 518 519 convexity DGM betaport future INDEX INTL CAP BUD SANDRINE LEASING PV, FV, ANNUITY DIR right clean RI HON Rea KE CAPM UTILITY, SHARPE, beta ferences: AG470 YIELD bond portfolio WACC BOJ 130% - 9 * * ENG O _+ 0 2. 25-11-2019