Example: 2 Risky Assets ■ Suppose we have two assets, US and JP, with: Mean Volatility US E[R₁] = 13.6% 0₁ = 15.4% JP E[R₂] = 15.0% σ₂ = 23.0% 02 and with correlation p = 27%. ■ If an investor holds w₁ = 60% in the US and w₂ = 40% in JP, what is the expected return and the volatility of the portfolio?

Give typing answer with explanation and conclusion  Consider a world with only two risky assets, A and B, and a risk-free asset. Stock A is held at 1/3 at a price per share of $3.00, an expected return of 16% and a σ of 30%. Stock B is held at 2/3 at a price per share of $4.00, an expected return of 10% and a σ of 15%. The correlation between A and B is 0.4 , the covariance of stock A with the market Cov(RA,RM) is 0.042. (a) What is the expected return of the market portfolio? Answer % (b) What is the variance of the market portfolio? Answer (c) What is the beta of each stock? β_Α=Answer β_Β=Answer

Assume that you are considering investing in two risky assets, namely PKX and XIY, with the following probability distribution. Assume that short selling is allowed. Stock РКХ XIY State of the world Probability Return (%) Return (%) 1 0.25 18 2 0.30 5 -3 3 0.20 12 15 4 0.10 4 12 0.15 6 1 1. Calculate the expected return and risk for each of these assets. Interpret. 2. Consider a portfolio that contains PKX and XIY. Note that XIY comprises 30% of the portfolio. What is the expected return and risk of this portfolio? 3. How will your answer in (2) change if XIY comprises 20% of the portfolio only? Comment on your findings.

The possible rates of return of two assets, A and B, under different economic conditions are given below: Economic Situation  Probability  Return of Asset A  Return of Asset B Recession             0.2              10%                 6% Stable                 0.5              14%                15% Growth                0.3              20%                 11% An investor places 50% of his funds in Asset A and 50% in Asset B. [Note: you may use correlation between A and B as 0.2401] Required:   (i)Calculate the risk and expected return for each asset.    (ii)Calculate the risk and expected return of the investor’s 2-assets portfolio.   (iii) What do you understand by total risk?

Consider the following financial market with two risky assets x and y as well as a risk-free asset f: E[r]. x (10%, 8%) •z (6.6%, 6.3%) y (8%, 5%) (0%, 3%) f Is it possible to construct portfolio z with existing assets? Explain.

QUESTION 2 Exhibit 6.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)   Asset (A) Asset (B) E(RA) = 25% E(RB) = 15% (σA) = 18% (σB) = 11% WA = 0.75 WB = 0.25 COVA,B = −0.0009   Refer to Exhibit 6.2. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation ( σ i ), covariance (COVi,j), and asset weight (Wi) are as shown above?   a. 18.64%   b. 22.5%   c. 11%   d. 13.65%   e. 20.0%

Consider the following information (Assume that Security M and Security N are in the same financial market):                   Standard Deviation                  BetaSecurity M        20%                                   1.25Security N        30%                                    0.80 Which security has more total risk? Group of answer choices Security M Security N Equal

Assume a finite state economy with three assets whose payoff matrix is given by 30 20 50 D = 20 15 35 (a) Suppose that the asset prices are $28, $18, and $47, respectively. Is there an arbitrage opportunity in the market? (b) If the price of the third asset reduces to $46, is there an arbitrage oppor- tunity in the market?

Assume we live in a world where there exist only two risky assets and a risk-free asset with a return of 2%. You are given the following information: Risky Asset Market Cap E(r) В 02 (variance) A B ($Mil) 661 7.59% 0.9124 0.04 339 9.17% 1.1697. 0.09 OAB (covariance) 0.015 1) What would be the expected return on the market portfolio? (hint: how is the market portfolio weighted?) 2) What is the covariance between Risky Asset A and the market portfolio (i.c. σA,M)? (covariance "FOIL"...? Actually more than one way to solve for this) 3) What is the variance of the market portfolio? 4) What is the systematic risk component of Stock A's total variance? (hint: not systematic risk in terms of Beta, but systematic risk in terms of variance) Multiple Choice О 1) 0.0759 2) 0.04043 3) 0.03456 4) 0.04728 1) 0.0813 2) 0.04043 3) 0.03015

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