(Computing the standard deviation for a portfolio of two risky investments) Mary Gulott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has leamed in business school. Specifically, she is evaluating an investment in a portfolio comprised of two fiems' common stock. She has collected the following information about the common stock of Firm A and Fimm B at Mary invests half her money in each of the two common stocks, what is the portfolio's expected rate of return and standard deviation in portfolio return? b. Answer part a where the correlation between the two common stock investments is equal to zero. c. Answer part a where the correlation between the two common stock investments is equal to 1 d. Answer part a where the correlation between the two common stock investments is equal to -1 e. Using your responses to questions a-d, describe the relationship between the correlation and the risk and retum of the portfolio. a. It Mary decides to invest 50% of her money in Firm A's common stock and 50% in Firm Er's common stock and the correlation between the two stocks is 0.50, then the expected rate of return in the portfolio is (Round to two decimal places)
(Computing the standard deviation for a portfolio of two risky investments) Mary Gulott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has leamed in business school. Specifically, she is evaluating an investment in a portfolio comprised of two fiems' common stock. She has collected the following information about the common stock of Firm A and Fimm B at Mary invests half her money in each of the two common stocks, what is the portfolio's expected rate of return and standard deviation in portfolio return? b. Answer part a where the correlation between the two common stock investments is equal to zero. c. Answer part a where the correlation between the two common stock investments is equal to 1 d. Answer part a where the correlation between the two common stock investments is equal to -1 e. Using your responses to questions a-d, describe the relationship between the correlation and the risk and retum of the portfolio. a. It Mary decides to invest 50% of her money in Firm A's common stock and 50% in Firm Er's common stock and the correlation between the two stocks is 0.50, then the expected rate of return in the portfolio is (Round to two decimal places)
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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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Finance
Transcribed Image Text:Data table
Expected
Return
0.14
Firm A's common stock
Firm B's common stock
Correlation coefficient
(Click on the icon in order to copy its contents into a spreadsheet.)
Print
0.19
0.50
Done
Standard
Deviation
0.16
0.23
-
X
Transcribed Image Text:(Computing the standard deviation for a portfolio of two risky investments) Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings
as a way of applying what she has learned in business school. Specifically, she is evaluating an investment in a portfolio comprised of two firms' common stock. She has collected the following
information about the common stock of Firm A and Firm B
a. If Mary invests half her money in each of the two common stocks, what is the portfolio's expected rate of return and standard deviation in portfolio return?
b. Answer part a where the correlation between the two common stock investments is equal to zero.
c. Answer part a where the correlation between the two common stock investments is equal to 1.
d. Answer part a where the correlation between the two common stock investments is equal to -1,
e. Using your responses to questions a-d, describe the relationship between the correlation and the risk and return of the portfolio.
COXD
a. If Mary decides to invest 50% of her money in Firm A's common stock and 50% in Firm B's common stock and the correlation between the two stocks is 0.50, then the expected rate of return in
the portfolio is (Round to two decimal places)
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