Abigail Grace has a $900,000 fully diversified portfolio. She subsequently inherits ABC Company common stock worth $100,000. Her financial adviser provided her with the following estimates: Risk and Return Characteristics Expected Monthly Returns Standard Deviation of Monthly Returns Original Portfolio 0.67% 2.37% ABC Company 1.25 2.95 The correlation coefficient of ABC stock returns with the original portfolio returns in .40. The inheritance changes Grace’s overall portfolio, and she is deciding whether to keep the ABC stock. Assuming Grace keeps the ABC stock, calculate the: Expected return of her new portfolio, which includes the ABC stock. Covariance of ABC stock returns with the original portfolio returns. Standard deviation of her new portfolio, which includes the ABC stock.

Abigail Grace has a $900,000 fully diversified portfolio. She subsequently inherits ABC Company common stock worth $100,000. Her financial adviser provided her with the following estimates: Risk and Return Characteristics Expected Monthly Returns Standard Deviation of Monthly Returns Original Portfolio 0.67% 2.37% ABC Company 1.25 2.95 The correlation coefficient of ABC stock returns with the original portfolio returns in .40. The inheritance changes Grace’s overall portfolio, and she is deciding whether to keep the ABC stock. Assuming Grace keeps the ABC stock, calculate the: Expected return of her new portfolio, which includes the ABC stock. Covariance of ABC stock returns with the original portfolio returns. Standard deviation of her new portfolio, which includes the ABC stock.

SWFT Comprehensive Vol 2020

43rd Edition

ISBN:9780357391723

Author:Maloney

Publisher:Maloney

Chapter6: Deductions And Losses: In General

Section: Chapter Questions

Problem 52P

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Question

Abigail Grace has a $900,000 fully diversified portfolio. She subsequently inherits ABC Company common stock worth $100,000. Her financial adviser provided her with the following estimates:

Risk and Return Characteristics
	Expected Monthly Returns	Standard Deviation of Monthly Returns
Original Portfolio	0.67%	2.37%
ABC Company	1.25	2.95

The correlation coefficient of ABC stock returns with the original portfolio returns in .40.

The inheritance changes Grace’s overall portfolio, and she is deciding whether to keep the ABC stock. Assuming Grace keeps the ABC stock, calculate the:

Expected return of her new portfolio, which includes the ABC stock.
Covariance of ABC stock returns with the original portfolio returns.
Standard deviation of her new portfolio, which includes the ABC stock.

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