consider a portfolio that maintains a   75% weight on stock A and a   25% weight on stock B. a. What is the return each year of this​ portfolio? b. Based on your results from part ​(a​), compute the average return and volatility of the portfolio. c. Show that​ (i) the average return of the portfolio is equal to the​ (weighted) average of the average returns of the two​ stocks, and​ (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.9. d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks.       Question content area bottom Part 1 a. What is the return each year of this​ portfolio?   Enter the return of this portfolio for each year in the table​ below: ​ (Round to two decimal​ places.)   Year 2010 2011 2012 2013 2014 2015 Portfolio enter your response here​% enter your response here​% enter your response here​% enter your response here​% enter your response here​% enter your response here​% Part 2 b. Based on your results from part ​(a​), compute the average return and volatility of the portfolio.   The average return of the portfolio is enter your response here​%. ​ (Round to two decimal​ places.) Part 3 The volatility of the portfolio is enter your response here​%. ​(Round to two decimal​ places.) Part 4 c. Show that​ (i) the average return of the portfolio is equal to the​ (weighted) average of the average returns of the two​ stocks, and​ (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.9.   The average annual return for stock A is enter your response here​%. ​ (Round to two decimal​ places.) Part 5 The average annual return for stock B is enter your response here​%. ​ (Round to two decimal​ places.) Part 6 The​ (weighted) average of the average returns of the two stocks is enter your response here​%. ​ (Round to two decimal​ places.) Part 7 The volatility of the portfolio is enter your response here​%. ​ (Round to two decimal​ places.) Part 8 d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks.  ​(Select from the​ drop-down menu.)   The portfolio has a ▼   higher lower volatility than the average volatility of the two stocks because some of the idiosyncratic risk of the stocks in the portfolio is diversified away.   Click on the following icon   in order to copy its contents into a​ spreadsheet.)   Year 2010 2011 2012 2013 2014 2015 Stock A ​-9%% 5% ​3% -8% 3​% 15%             Stock B ​29% 1% ​20% -5% ​-11% 22%

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
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Using the data in the following​ table,
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​,
consider a portfolio that maintains a
 
75% weight on stock A and a
 
25% weight on stock B.
a. What is the return each year of this​ portfolio?
b. Based on your results from part
​(a​),
compute the average return and volatility of the portfolio.
c. Show that​ (i) the average return of the portfolio is equal to the​ (weighted) average of the average returns of the two​ stocks, and​ (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.9.
d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks.
 
 
 

Question content area bottom

Part 1
a. What is the return each year of this​ portfolio?
 
Enter the return of this portfolio for each year in the table​ below: ​ (Round to two decimal​ places.)
 
Year
2010
2011
2012
2013
2014
2015
Portfolio
enter your response here​%
enter your response here​%
enter your response here​%
enter your response here​%
enter your response here​%
enter your response here​%
Part 2
b. Based on your results from part
​(a​),
compute the average return and volatility of the portfolio.
 
The average return of the portfolio is
enter your response here​%.
​ (Round to two decimal​ places.)
Part 3
The volatility of the portfolio is
enter your response here​%.
​(Round to two decimal​ places.)
Part 4
c. Show that​ (i) the average return of the portfolio is equal to the​ (weighted) average of the average returns of the two​ stocks, and​ (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.9.
 
The average annual return for stock A is
enter your response here​%.
​ (Round to two decimal​ places.)
Part 5
The average annual return for stock B is
enter your response here​%.
​ (Round to two decimal​ places.)
Part 6
The​ (weighted) average of the average returns of the two stocks is
enter your response here​%.
​ (Round to two decimal​ places.)
Part 7
The volatility of the portfolio is
enter your response here​%.
​ (Round to two decimal​ places.)
Part 8
d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks.  ​(Select from the​ drop-down menu.)
 
The portfolio has a
 
higher
lower
volatility than the average volatility of the two stocks because some of the idiosyncratic risk of the stocks in the portfolio is diversified away.
 
Click on the following icon
 
in order to copy its contents into a​ spreadsheet.)
 
Year
2010
2011
2012
2013
2014
2015
Stock A
​-9%%
5%
​3%
-8%
3​%
15%
         
 
Stock B
​29%
1%
​20%
-5%
​-11%
22%
         
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