Greta, an elderly investor, has a degree of risk aversion of A= 4 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 4-year strategies. (All rates are annual, continuously compounded.) The S&P 500 risk premium is estimated at 6% per year, with a SD of 18%. The hedge fund risk premium is estimated at 4% with a SD of 24%. The return on each of these portfolios in any year is uncorrelated with its return or the return of any other portfolio in any other year. The hedge fund management claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta believes this is far from certain. Compute the estimated 1-year risk premiums, SDs, and Sharpe ratios for the two portfolios. (Do not round your intermediate calculations. Round "Sharpe ratios" to 4 decimal places and other answers to 2 decimal places.) Hedge Fund Portfolio S&P Portfolio Risk premiums SDs Sharpe ratios

Greta, an elderly investor, has a degree of risk aversion of A= 4 when applied to return on wealth over a one-year horizon. She is pondering two portfolios, the S&P 500 and a hedge fund, as well as a number of 4-year strategies. (All rates are annual, continuously compounded.) The S&P 500 risk premium is estimated at 6% per year, with a SD of 18%. The hedge fund risk premium is estimated at 4% with a SD of 24%. The return on each of these portfolios in any year is uncorrelated with its return or the return of any other portfolio in any other year. The hedge fund management claims the correlation coefficient between the annual returns on the S&P 500 and the hedge fund in the same year is zero, but Greta believes this is far from certain. Compute the estimated 1-year risk premiums, SDs, and Sharpe ratios for the two portfolios. (Do not round your intermediate calculations. Round "Sharpe ratios" to 4 decimal places and other answers to 2 decimal places.) Hedge Fund Portfolio S&P Portfolio Risk premiums SDs Sharpe ratios

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 7E

See similar textbooks

Similar questions

Chemitronix Ltd. is a microchips manufacturing company. It was found that the business is at the maturity stage, demanding some change. After rigorous research, management came up with the following decision variables.Expansion: 45% chance of gaining 1,500,00; 55% chance of losing XNew Product: 50% chance of gaining 900,000; 50% chance of losing 539740What must have been the value of expansion loss if expansion and new product will result to the same expected monetary values?
An analyst gathers the following information about the performance of a portfolio (S millions). The portfolio's annual time-weighted rate of return is closest to: A) 32% B)27% C) 8% Quarter Value at Beginning of Quarter Cash Inflow (Outfiow) at beginning of Quarter Value at end of quarter 1 2.0 0.2 2.4 2 2.4 0.4 2.6 3 2.6 (0.2) 3.2 4 3.2 1.0 4.1
An FI has a $100 million portfolio of six-year Eurodollar bonds that have an 8 percent coupon. The bonds are trading at par and have a duration of five years. The FI wishes to hedge the portfolio with T-bond options that have a delta of –0.625. The underlying long-term Treasury bonds for the option have a duration of 10.1 years and trade at a market value of $96,157 per $100,000 of par value. Each put option has a premium of 3.25 (percent of $100,000). Bonds put options are necessary to hedge the bond 824 How far must interest rates move before the payoff on the hedge will exactly offset the cost of placing the hedge? How far must interest rates move before the gain on the bond portfolio will exactly offset the cost of placing the hedge? If interest rates increase 100 basis points, what is the expected gain or loss on the put option hedge?
Assume a pool of 115 people in an insurance pool (a group of people insured through community rating). It is estimated that a small number in the pool will have significant pre- existing conditions as indicated in the table. Based on the age of these 115 people, the insurance company estimates the following distribution of health care claims (which includes necessary profit and administrative costs of the insurance company). Number of Insured Antidipated Heath Costs/Year/Person $1,400 $1,500 $1,600 $1,700 $1,800 $1,900 $2,000 $2,100 $2,200 $2.300 $2,400 $2,500 $2,700 $2,000 $2,900 $3,000 $3,100 $3.200 $3.300 $4,000 57,00 $10,000 Everyone joins the poal ad pays the necessary premum in the first year. The clams experience of the customers is faund to be generaly consstent with expeclations of the insurance company. A) What would be the premium In the third year if there is no inflation, based on the company's oxperience from the past year? B) If those customers who have anticipated…
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games. The purchase cost for a 2-year franchise to sell the wigs is $20,000. If demand is good (40% probability), then the net cash flows will be $27,000 per year for 2 years. If demand is bad (60% probability), then the net cash flows will be $9,000 per year for 2 years. Fethe's cost of capital is 14%. A. What is the expected NPV of the project? B. Use decision-tree analysis to calculate the expected NPV of this project, including the option to continue for an additional 2 years. B. Use decision-tree analysis to calculate the expected NPV of this project, including the option to continue for an additional 2 years.
Barnes' Binoculars is considering licensing the technology to manufacture a new bifocal binocular. If Barnes decides to undertake the project, they will spend $1 million immediately to license the technology and build a prototype. If the prototype works as expected (60% probability), they will spend $5 million in Year 1 to build a manufacturing facility. This will take a year to complete. If the prototype doesn't work out (40% probability), they will abandon the project, sell the license, and receive $100,000 in Year 1 for the license. Once the manufacturing facility is built, then cash flows will be $8 million per year for 10 years starting in Year 2 if there is good market acceptance (70% probability). Cash flows will be $2 million per year for 10 years if there is poor market acceptance (30% probability). The WACC is 10%. Calculate the ENPV of the project. $14.12…
The tree diagram in figure below describes the uncertain cash flows for an engineering project. The analysis period is two years, and MARR = 18% per year. Based on this information, a. What are the E(PW), V(PW), and SD(PW) of the project? b. What is the probability that PW20? Click the icon to view the tree diagram. Click the icon to view the interest and annuity table for discrete compounding when the MARR is 18% per year, a. Calculate the E(PW), V(PW), and SD(PW) of the project. E(PW)-$ (Round to the nearest dollar) KILR
a) Assume we are now in mid- or late February 2022. After conducting your own analysis, you have made a decision to buy shares of ENV in March. However, your friend, Jaden who is a financial advisor for ENV tells you that ENV's earnings for the fourth quarter 2021 is higher than the analyst estimates. He suggests you to buy its shares immediately (i.e. in midor late February 2022) before this information is announced to the public (and price increases). Please state and explain which CFA Institute Code and Standards Jaden has breached.
JAHORAGINTAUAKE A firm has identified good investment opportunities to invest $350 at an average 45 per cent rate of return. The firm has initial fund of $490. If the market rate is 20 per cent, find the net present value of the firm for the investment decision under Two-Period Perfect Certainty Model?
= 1. (i) A utility function has the form U(w) aw³ +bw² where a, b E R. Assuming w > 0 and a 0, is U(w) ever suitable for a non-satiated and risk-averse investor? If it is, state the range of values of w this holds for as a function of a and b. You must include your working. (ii) Give an example of a utility function with DARA. Show all your working. (iii) An investor has IRRA. Would this investor prefer a fair gamble or to do nothing? Provide a short explanation of your answer.
One of the international companies intends to open a project to produce solar energy in Mosul for a period of 8 years. The volume of investment in the project is (1,800,000) dollars, the annual revenues are estimated at (400,000) dollars, and the annual costs are (90,000) dollars. Calculate the project's internal rate of return, knowing that the discount rate is the lowest (10%) and the highest (20%) and whether the project is accepted or rejected.. 1 10:39
ABC Company's most recent dividend (D0) was $10 and its dividends growth rate is 5% percent per year. If an investor with 15% required rate of return sells the stocks at $113 in the 2nd year, he/she would have a ____ because the true price of the stocks in the 2nd year (P2) would be _____ a Gain; $115,76 b. Loss; $115,76 c. Gain; $110,25 d. Loss; $110,25