Elsi is a risk-averse investor. She has invested 60% of her investment in share A and all the remainder in share B. Below are projections for the shares as well as the market. A B Market Expected return (%) Standard deviation (%) 10 30 20 40 70 30 Correlations A 1 B 0.2 1 Market 0.3 0.68 1 Required: a) What are the expected return and standard deviation of returns on the portfolio? b) The correlation between A and B is expected to be -1, what proportion should Elsi invest in A in order to form a minimum variance portfolio? Assume that she will invest only in A and B. Elsi is wondering if beta is a more appropriate risk measure for the shares. Explain when beta is a more appropriate measure of risk than standard deviation. c)
Elsi is a risk-averse investor. She has invested 60% of her investment in share A and all the remainder in share B. Below are projections for the shares as well as the market. A B Market Expected return (%) Standard deviation (%) 10 30 20 40 70 30 Correlations A 1 B 0.2 1 Market 0.3 0.68 1 Required: a) What are the expected return and standard deviation of returns on the portfolio? b) The correlation between A and B is expected to be -1, what proportion should Elsi invest in A in order to form a minimum variance portfolio? Assume that she will invest only in A and B. Elsi is wondering if beta is a more appropriate risk measure for the shares. Explain when beta is a more appropriate measure of risk than standard deviation. c)
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
Related questions
Question
Transcribed Image Text:Elsi is a risk-averse investor. She has invested 60% of her investment in share A and all the
remainder in share B. Below are projections for the shares as well as the market.
A
В
Market
Expected return (%)
Standard deviation (%)
10
30
20
40
70
30
Correlations
A
1
0.2
1
Market
0.3
0.68
1.
Required:
a)
What are the expected return and standard deviation of returns on the portfolio?
b)
The correlation between A and B is expected to be -1, what proportion should Elsi invest
in A in order to form a minimum variance portfolio? Assume that she will invest only in A
and B.
c)
Elsi is wondering if beta is a more appropriate risk measure for the shares. Explain when
beta is a more appropriate measure of risk than standard deviation.
d)
Calculate the beta of A and B.
Construct a portfolio for Elsi. The portfolio will consist of shares A and B and have the
same level of systematic risk as the market.
e)
i)
What will be the expected return and standard deviation of returns on the portfolio?
ii)
Should Elsi invest in the portfolio? Explain why.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps with 5 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education