6. My. Sy wants to find a new investment for his portfolio. He is looking for a safe investment that provides stable returns. He considers the following options for investment: Stocks: He was offered a stock of ABC Corp. It is a mature company with strong operational and financial performance. The volatility (standard deviation or sd) of the stock is 10% and the expected return (mean) is 14% Exchange-Traded Fund(ETF): The ETF with strong financial performance offers an expected return (mean) of 13% with a volatility (standard deviation or sd) of 7% Bonds: Bonds with excellent credit ratings offer an expected return of 3% with 2% volatility. What do you think is the most suitable investment opportunity for Mr. Sy? Why? (show your solution) Note: In order to select the most suitable investment opportunity, you have to calculate the coefficient of variation for each option using

6. My. Sy wants to find a new investment for his portfolio. He is looking for a safe investment that provides stable returns. He considers the following options for investment: Stocks: He was offered a stock of ABC Corp. It is a mature company with strong operational and financial performance. The volatility (standard deviation or sd) of the stock is 10% and the expected return (mean) is 14% Exchange-Traded Fund(ETF): The ETF with strong financial performance offers an expected return (mean) of 13% with a volatility (standard deviation or sd) of 7% Bonds: Bonds with excellent credit ratings offer an expected return of 3% with 2% volatility. What do you think is the most suitable investment opportunity for Mr. Sy? Why? (show your solution) Note: In order to select the most suitable investment opportunity, you have to calculate the coefficient of variation for each option using

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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Question

100%

6. My. Sy wants to find a new investment for his portfolio. He is looking for a safe
investment that provides stable returns. He considers the following options for
investment:
Stocks: He was offered a stock of ABC Corp. It is a mature company with strong
operational and financial performance. The volatility (standard deviation or sd) of
the stock is 10% and the expected return (mean) is 14%
Exchange-Traded Fund(ETF): The ETF with strong financial performance
offers an expected return (mean) of 13% with a volatility (standard deviation or
sd) of 7%
Bonds: Bonds with excellent credit ratings offer an expected return of 3% with
2% volatility.
What do you think is the most suitable investment opportunity for Mr. Sy? Why? (show
your solution)
Note: In order to select the most suitable investment opportunity, you have to calculate
the coefficient of variation for each option using

volatlity
100%
where volatility is the standard deviation
Lexpected return
and expected return is the mean
Note: In finance, the coefficient of variation allows investors to determine how much
volatility, or risk, is assumed in comparison to the amount of return expected from
investments. The lower the coefficient of variation, the better the investment opportunity.
Stocks
ETF
What is the most suitable investment for
Mr. Sy? Why?
Bonds

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6) An investor holds a portfolio of stocks and is considering investing in the DBB Company. The firm's prospects look neutral, and you estimate the following probability distribution of possible returns: Conditions Recession P Returns on DBB Returns on DVI 0.12 -33% -12% Below Average 0.15 -18% 7% Average 0.46 12% 11% Above Average 0.15 25% 23% Boom 0.12 37% 25% a) How much is the expected return for DBB? b) How much is the coefficient of variation for DBB? c) Now let's say you want to add another asset, DVI, to your portfolio. You sell 35% of DBB to purchase DVI. How much is your expected return for this portfolio? d) How much is the coefficient of variation for the new portfolio?
Anna holds a portfolio comprising the following 3 stocks: X, Y and Z. Investment Amount Beta. Expected return Security X $2000. 1.3. Security Y $1000. 1. 10% Security Z. $500. 0. 2% a. Determine the expected return of security X. b. Calculate the return of Anna’s portfolio. c. Calculate the beta of Anna’s portfolio. d. To reduce the systematic risk of the portfolio, Anna is considering 3 securities to add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and Security C has a beta of -0.3. Discuss which security will be most effective in reducing the portfolio’s systematic risk? How would portfolio expected return change (higher or lower) if you add this security?
2B) You have $600,000 to invest in the stock market. Suppose you invested one-third of your wealth in stock Q and the rest in stock L. These stocks have the following characteristics: Stock Q has an expected return of 10% and a standard deviation of 7%. Stock L has an expected return of 18% and a standard deviation of 11%. Determine the expected return and standard deviation on a portfolio of stocks Q and L, when the two stocks are uncorrelated and when they are negatively perfectly correlated. Interpret and compare your answers in these two cases.
On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? _______________ Calculate the required return of a portfolio that has $6,000 invested in Stock X and $5,000 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places. rp = __________% If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
1. You are trying to plan your investments for the next year. You havedecided that the market will either be strong (a bull market), weak (abear market) or normal. You think that stocks, bonds, and bills will earn the following retruns in these secnarios:You have also decided that you have a risk-aversion (A) of 8. (a) What is the expected return for each of the securities?(b) What is the volatility of each security return?(c) What is the covariance between stock and bond returns?
7. Diversification and risk The graph shows the relationship between risk, measured as the standard deviation of a stock portfolio's return, and the number of different stocks in the portfolio for a hypothetical stock market. RISK (Standard deviation of portfolio return) 60 20 01 4 True 10 20 30 NUMBER OF STOCKS IN PORTFOLIO True or False: Increasing the number of stocks in a portfolio reduces firm-specific risk. False 40 ?
Elsi is a risk-averse investor. She has invested 60% of her investment in share A and all the remainder in share B. Below are projections for the shares as well as the market. A В Market Expected return (%) Standard deviation (%) 10 30 20 40 70 30 Correlations A 1 0.2 1 Market 0.3 0.68 1. Required: a) What are the expected return and standard deviation of returns on the portfolio? b) The correlation between A and B is expected to be -1, what proportion should Elsi invest in A in order to form a minimum variance portfolio? Assume that she will invest only in A and B. c) Elsi is wondering if beta is a more appropriate risk measure for the shares. Explain when beta is a more appropriate measure of risk than standard deviation. d) Calculate the beta of A and B. Construct a portfolio for Elsi. The portfolio will consist of shares A and B and have the same level of systematic risk as the market. e) i) What will be the expected return and standard deviation of returns on the portfolio? ii)…

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