16. There are two stocks with the following return and risk values. The correlation between A and B is 0.2. al Expected Standard Return(%) Deviation(%) Stock A 5.5 10 B 7.5 17 What is the standard deviation of the minimum variance portfolio(MVP) that is a) formed by combining assets A and B? (That is, what are the weights of stock A and stock B in MVP?) b) What is the expected return of the portfolio P that is formed by investing 50% on the MVP and 50% on a stock that has an expected return of 10%? c) Assume that the only assets available to investors are the risk free asset and the portfolio P. The risk free rate is 2%. Assume also that there is $100 to be invested. What is the expected return of a NEW portfolio that is formed by combining risk free rate with a weight of -0.5 and portfolio P with a weight of 1.5? What does a negative weight mean? Explain with one sentence
16. There are two stocks with the following return and risk values. The correlation between A and B is 0.2. al Expected Standard Return(%) Deviation(%) Stock A 5.5 10 B 7.5 17 What is the standard deviation of the minimum variance portfolio(MVP) that is a) formed by combining assets A and B? (That is, what are the weights of stock A and stock B in MVP?) b) What is the expected return of the portfolio P that is formed by investing 50% on the MVP and 50% on a stock that has an expected return of 10%? c) Assume that the only assets available to investors are the risk free asset and the portfolio P. The risk free rate is 2%. Assume also that there is $100 to be invested. What is the expected return of a NEW portfolio that is formed by combining risk free rate with a weight of -0.5 and portfolio P with a weight of 1.5? What does a negative weight mean? Explain with one sentence
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
Concept explainers
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
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
Transcribed Image Text:16.
There are two stocks with the following return and risk values. The correlation between A and B is 0.2.
al
Expected Standard
Return(%) Deviation(%)
Stock
A
5.5
10
B
7.5
17
What is the standard deviation of the minimum variance portfolio(MVP) that is
a)
formed by combining assets A and B? (That is, what are the weights of stock A and stock B in
MVP?)
b)
What is the expected return of the portfolio P that is formed by investing 50% on the
MVP and 50% on a stock that has an expected return of 10%?
c) Assume that the only assets available to investors are the risk free asset and the
portfolio P. The risk free rate is 2%. Assume also that there is $100 to be invested. What is the
expected return of a NEW portfolio that is formed by combining risk free rate with a weight of -0.5
and portfolio P with a weight of 1.5? What does a negative weight mean? Explain with one
sentence
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 6 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