7. Portfolio expected return and risk A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the investor's expected rate of return. Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio. Consider the following case: Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table: Stock Artemis Inc. Percentage of Portfolio 20% Expected Return 6.00% Standard Deviation 26.00%
7. Portfolio expected return and risk A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the investor's expected rate of return. Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio. Consider the following case: Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table: Stock Artemis Inc. Percentage of Portfolio 20% Expected Return 6.00% Standard Deviation 26.00%
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
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![## 7. Portfolio Expected Return and Risk
A collection of financial assets and securities is referred to as a **portfolio**. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. **Portfolio risk** refers to the possibility that an investment portfolio will not generate the investor’s expected rate of return.
Analyzing portfolio risk and return involves understanding the expected returns from a portfolio.
Consider the following case:
Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table:
| **Stock** | **Percentage of Portfolio** | **Expected Return** | **Standard Deviation** |
|---------------------|-----------------------------|---------------------|------------------------|
| Artemis Inc. | 20% | 6.00% | 26.00% |
| Babish & Co. | 30% | 14.00% | 30.00% |
| Cornell Industries | 35% | 11.00% | 33.00% |
| Danforth Motors | 15% | 5.00% | 35.00% |
**What is the expected return on Andre’s stock portfolio?**
- [ ] 10.00%
- [ ] 7.50%
- [ ] 13.50%
- [X] 15.00%
Suppose each stock in Andre’s portfolio has a correlation coefficient of 0.4 (\( \rho = 0.4 \)) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the partially diversified four-stock portfolio is 31%, the portfolio’s standard deviation (\( \sigma_p \)) most likely is **31%**.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Faf434c73-38f1-4a89-b981-edd99d760c82%2F66da846c-b0aa-4161-a7c8-977c5883cc93%2Fdjqvy9a_processed.png&w=3840&q=75)
Transcribed Image Text:## 7. Portfolio Expected Return and Risk
A collection of financial assets and securities is referred to as a **portfolio**. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. **Portfolio risk** refers to the possibility that an investment portfolio will not generate the investor’s expected rate of return.
Analyzing portfolio risk and return involves understanding the expected returns from a portfolio.
Consider the following case:
Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table:
| **Stock** | **Percentage of Portfolio** | **Expected Return** | **Standard Deviation** |
|---------------------|-----------------------------|---------------------|------------------------|
| Artemis Inc. | 20% | 6.00% | 26.00% |
| Babish & Co. | 30% | 14.00% | 30.00% |
| Cornell Industries | 35% | 11.00% | 33.00% |
| Danforth Motors | 15% | 5.00% | 35.00% |
**What is the expected return on Andre’s stock portfolio?**
- [ ] 10.00%
- [ ] 7.50%
- [ ] 13.50%
- [X] 15.00%
Suppose each stock in Andre’s portfolio has a correlation coefficient of 0.4 (\( \rho = 0.4 \)) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the partially diversified four-stock portfolio is 31%, the portfolio’s standard deviation (\( \sigma_p \)) most likely is **31%**.
Transcribed Image Text:Emma holds a $5,000 portfolio that consists of four stocks. Her investment in each stock, as well as each stock’s beta, is listed in the following table:
| Stock | Investment | Beta | Standard Deviation |
|-----------------------|------------|------|--------------------|
| Andalusian Limited (AL) | $1,750 | 0.80 | 18.00% |
| Tobotics Inc. (TI) | $1,000 | 1.50 | 12.00% |
| Three Waters Co. (TWC) | $750 | 1.20 | 16.00% |
| Mainway Toys Co. (MTC) | $1,500 | 0.60 | 22.50% |
1. **Suppose all stocks in Emma’s portfolio were equally weighted. Which of these stocks would contribute the least market risk to the portfolio?**
- ( ) Andalusian Limited
- ( ) Three Waters Co.
- ( ) Tobotics Inc.
- ( ) Mainway Toys Co.
2. **Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the least amount of stand-alone risk?**
- ( ) Tobotics Inc.
- ( ) Mainway Toys Co.
- ( ) Three Waters Co.
- ( ) Andalusian Limited
3. **If the risk-free rate is 7% and the market risk premium is 8.5%, what is Emma’s portfolio’s beta and required return? Fill in the following table:**
| | Beta | Required Return |
|----------------|------|-----------------|
| Emma’s portfolio | | |
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