Chapter 8 problems: 3. You are evaluating various investment opportunities currently available and you have calculated expected

Chapter 8 problems: 3. You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets: Portfolio Expected Return Standard Deviation Q 7.8% 10.5% R 10.0 14.0 S 4.6 5.0 T 11.7 18.5 U 6.2 7.5 a. For each portfolio, calculate the risk premium per unit of risk that you expect to receive ([E(R) − RFR]/σ). Assume that the risk-free rate is 3.0 percent. b. Using your computations in Part a, explain which of these five portfolios is most likely to be the market portfolio. Use your calculations to draw the capital market line (CML). c. If you are only willing to make an investment with σ = 7.0%, is it possible for you to earn a return of 7.0 percent? d. What is the minimum level of risk that would be necessary for an investment to earn 7.0 percent? What is the composition of the portfolio along the CML that will generate that expected return? e. Suppose you are now willing to make an investment with σ = 18.2%. What would be the investment proportions in the riskless asset and the market portfolio for this portfolio? What is the expected return for this portfolio? 5. Based on five years of monthly data, you derive the following information for the companies listed: Company ai ( Intercept) σi r iM Intel 0.22 12.10% 0.72 Ford 0.10 14.60 0.33 Anheuser Busch 0.17 7.60 0.55 Merck 0.05 10.20 0.60 S&P 500 0.00 5.50 1.00 a. Compute the beta coefficient for each stock. b. Assuming a risk-free rate of 8 percent and an expected return for the market portfolio of 15 percent, compute the expected (required) return for all the stocks and plot them on the SML. c. Plot the following estimated returns for the next year on the SML and indicate which stocks are undervalued or overvalued. • Intel—20 percent • Ford—15 percent • Anheuser Busch—19 percent • Merck—10 percent 6. The following are the historic returns for the Chelle Computer Company: Year Chelle Computer General Index 1 37 15 2 9 13 3 −11 14 4 8 −9 5 11 12 6 4 9