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Marat540 [252]
3 years ago
11

Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: S

tock Expected Return Standard Deviation A 12 % 3 % B 19 9 Correlation = –1 Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Business
1 answer:
Tomtit [17]3 years ago
4 0

Answer:

0.135 or 13.5%

Explanation:

Given in the question are the following:

ERA = Expected return of Stock A = 12% = 0.12

ERB = Expected return of Stock B = 19% = 0.19

SDA = Standard deviation of Stock A = 3% = 0.03

SDB = Standard deviation of Stock B = 9% = 0.09

CAB = Correlation between A and B = -1

The correlation of -1 between Stock A and Stock B indicates that there a perfect negative correlation between the two stocks. Therefore, we can create a risk-free portfolio which its rate of return will be the risk-free rate in equilibrium.  

If we let wA denotes the proportion of investment in Stock A, and let wB denotes the proportion of investment in Stock B, the proportion of this portfolio can be obtained by setting its standard deviation equal to zero. Since there is a perfect negative correlation, the standard deviation of this portfolio (SDP) can be given as follows:

Absolute value [(wA × SDA) – (wB × SDB)] = SDP …………………………………….. (1)

Note that wB = (1 – wA) since the sum of the weight must be equal to 1.

Substituting all the relevant values into equation and set SDP = 0, we have  

[(0.03 × wA) − (0.11 × (1 - wA))] = 0

0.03wA – 0.11 + 0.11wA = 0

0.03wA + 0.11wA = 0.11

0.14wA = 0.11

wA = 0.11 ÷ 0.14 = 0.785714285714286

Since wB = 1 –wA, therefore:

wB = 1 - 0.785714285714286 = 0.214285714285714

The expected rate of return of the portfolio (ERP) can be estimated as follows:

ERP = (wA × ERA) + (wB × ERB)  ................................. (2)

Substituting all the relevant values into equation (2), we have:

ERP = (0.785714285714286 × 0.12) + (0.214285714285714 × 0.19)  

       = 0.0942857142857143 + 0.0407142857142857

ERP = 0.135 or 13.5%

Therefore, the value of the risk-free rate must be 13.5%.

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Which HCPCS level II codes allow suppliers to begin billing immediately for a service or item as soon as it is allowed to be mar
-BARSIC- [3]

Answer: miscellaneous code

Explanation:

The HCPCS level II miscellaneous codes include miscellaneous not otherwise classified codes that are reported to the food and drug Administration when a durable medial equipment, prosthetics, orthotics, and supplies (DMEPOS) dealer submits a claim for a product or service for which there is no existing HCPCS level II code.

8 0
3 years ago
On March 1, 2018, Gold Examiner receives $165,000 from a local bank and promises to deliver 100 units of certified 1-oz. gold ba
photoshop1234 [79]

Answer:

<u><em>there are two performance: </em></u>

the sales revenue and the insurance.

cash     165,000 debit

    unearned revenues   165,000 credit

--to record collectiong from local bank

unearned revenues  165,000 debit

    sales revenues                    151,000 credit

    insurance liability                  9,900  credit

--to record gold delivered to Brink's--

insurance liability   9,900 debit

      insurance fees earned       9,900 credit

--to record reception of bank from Brink/end of the insurance--

Explanation:

sales revenue

100 x 1,410 = 141,000 = 94%

insurance:

100 x 90 =       9,000 =   6%

   total         150,000

combo: 165,000

sales revenue:             165,000 x 94% = 155,100

insurance fee earned: 165,000 x 6% =      9,900

7 0
3 years ago
Cragmont has beginning equity of $277,000, net income of $63,000, withdrawals of $25,000 and no additional investments by owners
MatroZZZ [7]
The ending equity is $315,000 This is just a matter of adding income and subtracting withdraws. So let's do it. "Cragmont has beginning equity of $277,000," x = $277000 "net income of $63,000" x = $277000 + $63000 = $340000 "withdrawals of $25,000" x = $340000 - $25000 = $315000
3 0
3 years ago
If nations such as Germany, Japan, and the United States prohibited international trade in automobiles, a likely effect would be
Musya8 [376]

Answer:

C. the price effect would become a more significant consideration for each firm that makes automobiles.

Explanation:

The situation above is highly related to the topic about "supply" and "demand." If the nations of <em>Germany</em>,<em> Japan</em> and <em>the U.S.A</em>. prohibits the international trade in automobiles, this will result to a<u> surplus of automobile goods within the country.</u> Since these automobiles were meant to be sold abroad, the prohibition will<em> lower its international demand.</em> Such increase in supply will have a significant effect on the price of the automobiles. This is the reason why each firm should have to consider the situation's effect on the price of the automobiles and related goods.

So, this explains the answer.

4 0
3 years ago
delmont movers has a profit margin of 6.2 percent and net income of $48900. what is the common size percentage for the cost of g
ValentinkaMS [17]

Answer:

The common size percentage for the cost of goods sold is 48.05%

Explanation:

The profit margin reflects a company's overall ability to turn income into profit, is calculated by formula:

Profit margin = Net income/Net sales

Delmont movers has a profit margin of 6.2 percent and net income of $48,900

Net sales of the company = Net income/Profit margin = $48,900/6.2% = $788,709.68

The cost of goods sold amounted to $379,000.

The common size percentage for the cost of goods sold = (The cost of goods sold/Net sales) x 100% = ($379,000/$788,709.68) x 100% = 48.05%

4 0
3 years ago
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