3. Suppose that for some reason you are required to invest in 50% of your portfolio in bonds and 50% in stocks. If the covariance of your portfolio is 15%. a. What must be your correlation coefficient between stocks and bond returns? And SD of stocks and bonds are 25 and 12 respectively. b. What is the expected return of your portfolio if expected return on bonds and stocks are 6% and 10% respectively? c. Suppose that the correlation between stocks and bond returns is 0.22 but you are free to choose which ever portfolio proportions you desire, are you likely to be better or worse off than you were in part (a)?

3. Suppose that for some reason you are required to invest in 50% of your portfolio in bonds and 50% in stocks. If the covariance of your portfolio is 15%. a. What must be your correlation coefficient between stocks and bond returns? And SD of stocks and bonds are 25 and 12 respectively. b. What is the expected return of your portfolio if expected return on bonds and stocks are 6% and 10% respectively? c. Suppose that the correlation between stocks and bond returns is 0.22 but you are free to choose which ever portfolio proportions you desire, are you likely to be better or worse off than you were in part (a)?

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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5. Assume a portfolio compose of stocks and bonds. You were given the following relevant to the stocks and bonds: Stock Bond Covariance Stock 300 80 Bond 100 Solve for the portfolio variance and standard deviation given portfolio weights of 0.5 for both stocks and bonds.
Stocks A and B have the following returns: Stock A Stock B 1 0.09 0.06 0.05 0.02 3 0.13 0.05 4 - 0.01 0.02 5 0.08 - 0.03 a. What are the expected returns of the two stocks? b. What are the standard deviations of the returns of the two stocks? c. If their correlation is 0.48, what is the expected return and standard deviation of a portfolio of 52% stock A and 48% stock B? a. What are the expected returns of the two stocks The expected return for stock A is 1. (Round to three decimal places.) The expected return for stock B is 1. (Round to three decimal places.) b. What are the standard deviations of the returns of the two stocks? The standard deviation of the return for stock A is 1. (Round to four decimal places.) The standard deviation of the return for stock B is 1. (Round to four decimal places.) c. If their correlation is 0.48, what is the expected return and standard deviation of a portfolio of 52% stock A and 48% stock B? The expected return for the portfolio is 1. (Round to four…
Suppose you have the following expectations about the market condition and the returns on Stocks X and Y. a) What are the expected returns for Stocks X and Y, E(rX) and E(rY)? b) What are the standard deviations of the returns for Stocks X and Y, σX and σY?
Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Assume for a certain time period, long-term corporate bonds had an average return of 6.5 percent and a standard deviation of 8.5 percent. For the same period, T-bills had an average return of 3.3 percent and a standard deviation of 3.1 percent. Use the NORMDIST function in Excel to answer the following questions: a. What is the probability that in any given year, the return on long-term corporate bonds will be greater than 10 percent? Less than 0 percent? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the probability that in any given year, the return on T-bills will be greater than 10 percent? Less than 0 percent? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. c. In 1979, the return on long-term corporate bonds was -4.18 percent. How…
You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%.a. What are the betas of Stocks X and Y?b. What are the required rates of return on Stocks X and Y?c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?
Suppose securities A, B, and C have the following expected return and risk. Stock Expected return Risk A 8% 6% B 7% 9% C 13% 9% What is the coefficient of variation for stock A?
If an investor that owns a portfolio with 3 stocks increases their portfolio to 30 stocks, which of the following is MOST LIKELY to happen? Select one: a. risk will increase b. risk would decrease c. Systematic risk would increase d. return would increase
If an investor that owns a portfolio with 3 stocks increases their portfolio to 30 stocks, which of the following is MOST LIKELY to happen? Select one: a. risk would increase b. the Sharpe ratio would increase c. return would decrease d. Sharpe would decrease
1. A stock has a beta of 1.15 and an expected return of 14 percent. A risk-free asset Currently earns 4.2 percent. a . What is expected return on a portfolio that is equally in inverted assets? b. if portfolio of the two assets has beta of 75, what are the portfolio weights? C. if a portfolio of the two assets has an expected return of 8 percent .what is its beta? the two
f. Estimate Bartman's and Reynolds's betas by running regressions of their returns against the index's returns. Round your answers to four decimal places. Bartman's beta: fill in the blank 30 Reynolds's beta: fill in the blank 31 Are these betas consistent with your graph? These betas consistent with the scatter diagrams. g. Assume that the risk-free rate on long-term Treasury bonds is 4.5%. Assume also that the average annual return on the Winslow 5000 is not a good estimate of the market's required return—it is too high. So use 9% as the expected return on the market. Use the SML equation to calculate the two companies' required returns. Round your answers to two decimal places. Bartman's required return: fill in the blank 33 % Reynolds's required return: fill in the blank 34 % h. If you formed a portfolio that consisted of 50% Bartman and 50% Reynolds, what would the portfolio's beta and required return be? Round your answer for the portfolio's beta to four decimal places and…
The data on the expected return of 2 stocks (M and C) along with the economic conditions and their probabilities is attached below Questions : Calculate the expected return for asset M and asset C. Calculate the standard deviation for asset M and asset C. c) If asset M is a market portfolio, while the beta (β) for asset C is 1.25 and the risk-free asset is 6%. What is the required rate of return for asset C according to the CAPM method ?. .
A) What expected return should an investor expect from investments in common stock? You are given the following information: Risk free rate of return = 4%; market risk premium = 11%; Beta of the stock (assume CAPM holds) = 0.72. B) Stock A with beta of 0.8 offers a 11% return while stock B with a beta of 1.2 offers a 15% return. What is the risk-free rate? What is the common market return? Assume CAPM holds.

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