Exercise 6: a. Calculate the rate of return and standard deviation for the portfolio composed of 20% of the stocks A and 80% of the stocks B with the following characteristics: RA-10%, RB-20%, Sigma A=15%, Sigma B=30%, Correlation Coefficient =0.5. b. Assuming the short sale is possible, find the share of the stocks A and B in a portfolio D having an expected rate of return of 5%.

Exercise 6: a. Calculate the rate of return and standard deviation for the portfolio composed of 20% of the stocks A and 80% of the stocks B with the following characteristics: RA-10%, RB-20%, Sigma A=15%, Sigma B=30%, Correlation Coefficient =0.5. b. Assuming the short sale is possible, find the share of the stocks A and B in a portfolio D having an expected rate of return of 5%.

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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Parts A-C have already been answered, looking for answer D.
B 1.
Assume that the following data available for the portfolio, calculate the expected return, variance and standard deviation of the portfolio given stock A accounts for 45% and stock B accounts for 55% of your portfolio? (4 marks) A B Expected return 12.5% 18.5% Standard Deviation of return 15% 20% Correlation of coefficient (p) 0.4
An investor has preferences represented by the utility function U = E(r) - 20². What is her certainty equivalent return for a portfolio with an expected return of 10% and a standard deviation of 15%? Oa. 1.0% O b. 2.5% O c. 0.5% O d. 5.5% O e. 10.0%
Problem 3: Suppose the market portfolio has an expected return of 10% and astandard deviation of returns of 25%. The risk-free rate is 5%. Assume that theCAPM holds.a) What is the expected return of a stock that has a beta of 2?b) If a stock has an expected return of 15% and a standard deviation ofreturns of 70%, what fraction of the stock’s variance representsidiosyncratic risk?c) What is the expected return of the “best” portfolio that has a standarddeviation of returns of 70%? That is, how high an expected return canyou get if you are willing to hold a portfolio with σp = 70%?
Consider the following information on a portfolio of three stocks: State of Economy Probability of State of Economy Stock A Rate of Return Stock B Rate of Return Stock C Rate of Return Boom.13.02.32.50 Normal.55.10.22.20 Bust .32.16.21.35 If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio's expected return, the variance, and the standard deviation? Note: Do not round intermediate calculations. Round your variance answer to 5 decimal places, e.g., 16161. Enter your other answers as a percent rounded to 2 decimal places, e. g., 32.16. If the expected T-bill rate is 4.25 percent, what is the expected risk premium on the portfolio? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.
Suppose the risk-free return is 2% and the return on the market is 10%. The beta of a managed portfolio is 1.5, and the average realized return is 13%. According to the CAPM, Jensen’s alpha of the managed portfolio is: A) –1% B) 0% C) 1% D) 2% E) none of the above
Suppose Asset A has an expected return of 10 percent and a standard deviation of 10 percent. Asset B has an expected return of 20 percent and a standard deviation of 20 percent. If the correlation between A and B is (- 1), what are the expected return and standard deviation for a portfolio comprised of 40 percent Asset A and 60 percent Asset B?
3
3. Consider two perfectly correlated stocks A and B. The standard deviation of return on stock A is 10% and that of stock B is 15%. The standard deviation of the return of a portfolio that invests equally in stocks A and B is generally A. equal to 12.5% D. greater than 14% B. smaller than 12.5% C. greater than 12.5%

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