a. Based on the following information, calculate the expected return and standard deviation foreach of the following stocks. What are the covariance and correlation between the returns ofthe two stocks? Calculate the portfolio return and portfolio standard deviation if you investequally in each asset.ReturnsState of EconomyProbKRecession0.25-0.020.034Normal0.60.1380.062Boom0.150.2180.092b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and theexpected return on the market portfolio is 12 percent. Assume the capital asset pricing modelholds. What expected rate of return would a security earn if it had a .45 correlation with themarket portfolio and a standard deviation of 55 percent?c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9percent. The market portfolio has a variance of .0382. Portfolio Z has a correlation coefficientwith the market of .28 and a variance of 3285. According to the capital asset pricing model,what is the expected return on Portfolio Z?

Expected return refers to the amount of returns on estimated or probability basis for the future…

Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio retum and portfolio standard deviation if you invest equally in each asset. a. Returns State of Economy Prob K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092

Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio retum and portfolio standard deviation if you invest equally in each asset. a. Returns State of Economy Prob K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092

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

a. Based on the following information, calculate the expected return and standard deviation for
each of the following stocks. What are the covariance and correlation between the returns of
the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest
equally in each asset.
Returns
State of Economy
Prob
K
Recession
0.25
-0.02
0.034
Normal
0.6
0.138
0.062
Boom
0.15
0.218
0.092
b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of
7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the
expected return on the market portfolio is 12 percent. Assume the capital asset pricing model
holds. What expected rate of return would a security earn if it had a .45 correlation with the
market portfolio and a standard deviation of 55 percent?
c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9
percent. The market portfolio has a variance of .0382. Portfolio Z has a correlation coefficient
with the market of .28 and a variance of 3285. According to the capital asset pricing model,
what is the expected return on Portfolio Z?

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Consider the following table which provides a comparison of the returns for a portfolio and its benchmark. Year 0 1 2 3 4 5 Return Alpha Sum Tracking Error Information Ratio Note: the numbers in red are negative b. Calculate the portfolio alpha in percentage terms c. Calculate the tracking error of the portfolio in percentage terms Portfolio Return 16% 9% -35% 22% 84% Required a. Calculate the annualised return of the portfolio and the benchmark in percentage terms d. Calculate the information ratio of the portfolio to 2 decimal places e. Determine to 2 decimal places the amount of Carhart alpha for the portfolio in percentage terms if: o the risk-free rate is 3.25%, o the return of the market is 9.20%, o the exposure to the value factor (when the premium is 3.15%) is 0.65 (ie 65%), o the exposure to the small cap factor (when the premium is 2.05%) is -0.12, and o the exposure to the momentum factor (when the premium is 46%) is 0.1. Benchmark Return 14% 7% -38% 18% 86%
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