3. Consider two stocks A and B with expected returns of 6% (stock A) and 8% (stock B). The matrix of variances and covariances is presented below: Stock A B A 0.0064 -0.008 B -0.008 0.01 a. Write the variance of the portfolio composed of A and B as a function of the proportion x invested in stock A. (1-x) is invested in B. Short sales are not allowed on the market. b. Write the variance of the portfolio composed of A and B as a function of the portfolio's expected return. c. What are the proportions invested in the minimum risk portfolio composed of A and B?
3. Consider two stocks A and B with expected returns of 6% (stock A) and 8% (stock B). The matrix of variances and covariances is presented below: Stock A B A 0.0064 -0.008 B -0.008 0.01 a. Write the variance of the portfolio composed of A and B as a function of the proportion x invested in stock A. (1-x) is invested in B. Short sales are not allowed on the market. b. Write the variance of the portfolio composed of A and B as a function of the portfolio's expected return. c. What are the proportions invested in the minimum risk portfolio composed of A and B?
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
Related questions
Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:3. Consider two stocks A and B with expected returns of 6% (stock A) and 8% (stock B). The matrix
of variances and covariances is presented below:
Stock
A
В
A
0.0064
-0.008
B
-0.008
0.01
a. Write the variance of the portfolio composed of A and B as a function of the proportion x invested in
stock A. (1-x) is invested in B. Short sales are not allowed on the market.
b. Write the variance of the portfolio composed of A and B as a function of the portfolio's expected
return.
c. What are the proportions invested in the minimum risk portfolio composed of A and B?
d. Draw the graph of the portfolios combining A and B in a (V, E) space. V=variance, E=expected
return.
e. If the standard deviation of the pf is 7% what proportions were invested in A and B?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education