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.

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
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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:

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