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% 25.00% Babish & Co. 30% 14.00% 29.00% Cornell Industries 35% 11.00% 32.00% Danforth Motors 15% 3.00% 34.00% A. What is the expected return on Andre’s stock portfolio? 7.28% 13.10% 9.70% 14.55% B. Suppose each stock in Andre’s portfolio has a correlation coefficient of 0.4 (ρ = 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 30%, the portfolio’s standard deviation (σpσp) most likely is 30%.
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% 25.00% Babish & Co. 30% 14.00% 29.00% Cornell Industries 35% 11.00% 32.00% Danforth Motors 15% 3.00% 34.00% A. What is the expected return on Andre’s stock portfolio? 7.28% 13.10% 9.70% 14.55% B. Suppose each stock in Andre’s portfolio has a correlation coefficient of 0.4 (ρ = 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 30%, the portfolio’s standard deviation (σpσp) most likely is 30%.
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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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
|
Percentage of Portfolio
|
Expected Return
|
Standard Deviation
|
|---|---|---|---|
| Artemis Inc. | 20% | 6.00% | 25.00% |
| Babish & Co. | 30% | 14.00% | 29.00% |
| Cornell Industries | 35% | 11.00% | 32.00% |
| Danforth Motors | 15% | 3.00% | 34.00% |
A. What is the expected return on Andre’s stock portfolio?
7.28%
13.10%
9.70%
14.55%
B. Suppose each stock in Andre’s portfolio has a correlation coefficient of 0.4 (ρ = 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 30%, the portfolio’s standard deviation (σpσp) most likely is 30%.
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