1. Consider the returns of two shares, A and B, under three possible scenarios: Scenario I II III 6% Stock A 15% 50% Stock B 19% -1% 28% Probability 8% 23% 69% Compute (a) the expected returns of the stocks A and B; (b) the standard deviation of the returns of the stocks A and B; (c) how can you find the minimum variance portfolio? Show the method and provide the weights;
1. Consider the returns of two shares, A and B, under three possible scenarios: Scenario I II III 6% Stock A 15% 50% Stock B 19% -1% 28% Probability 8% 23% 69% Compute (a) the expected returns of the stocks A and B; (b) the standard deviation of the returns of the stocks A and B; (c) how can you find the minimum variance portfolio? Show the method and provide the weights;
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please answer question 1-c
Transcribed Image Text:1. Consider the returns of two shares, A and B, under three possible scenarios:
Scenario
I
II III
6%
Stock A
50%
19%
Stock B
Probability 8%
15%
-1%
-1% 28%
23%
569
69%
Compute
(a) the expected returns of the stocks A and B;
(b) the standard deviation of the returns of the stocks A and B;
(c) how can you find the minimum variance portfolio? Show the method and
provide the weights;
(d) the expected return and the standard deviation of the portfolio where
thewealth allocated to the A stock is three times that of the B stock.
(e) Assuming the risk free rate is equal to 5% write the equation of the
CapitalAllocation Line for the portfolio in point (d). What does the slope
represents?
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