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A. Calculate the expected return of his new portfolio. B. Calculate the covariance of ABC stock returns with the original portfolio. C. Calculate the risk level of the new portfolio.

A. Calculate the expected return of his new portfolio. B. Calculate the covariance of ABC stock returns with the original portfolio. C. Calculate the risk level of the new portfolio.

Essentials Of Investments
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 SEVEN Pungwa has a 900 Million diversified portfolio. He subsequently inherits ABC company stock worth 100 Million. His financial advisor provides him with the following forecasted information. Expected return Standard deviation Original portfolio 0.08 0.2844 ABC Company 0.14 0.354 The correlation coefficient of ABC stock's returns with the original portfolio returns is 0.04. Pungwa wants to know the effect of including ABC stock in his portfolio- assuming that Pungwa keeps the inherited stock. A. Calculate the expected return of his new portfolio. B. Calculate the covariance of ABC stock returns with the original portfolio. C. Calculate the risk level of the new portfolio. D. Assist Pungwa in interpreting the results you have calculated in (A), (B) and (C). E. Distinguish between systematic risks, non-systematic risks and discuss the statement, "Only market risk matters to a risk-averse investor."
Transcribed Image Text:QUESTION SEVEN Pungwa has a 900 Million diversified portfolio. He subsequently inherits ABC company stock worth 100 Million. His financial advisor provides him with the following forecasted information. Expected return Standard deviation Original portfolio 0.08 0.2844 ABC Company 0.14 0.354 The correlation coefficient of ABC stock's returns with the original portfolio returns is 0.04. Pungwa wants to know the effect of including ABC stock in his portfolio- assuming that Pungwa keeps the inherited stock. A. Calculate the expected return of his new portfolio. B. Calculate the covariance of ABC stock returns with the original portfolio. C. Calculate the risk level of the new portfolio. D. Assist Pungwa in interpreting the results you have calculated in (A), (B) and (C). E. Distinguish between systematic risks, non-systematic risks and discuss the statement, "Only market risk matters to a risk-averse investor."
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