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
If you must choose only two stocks to your investment portfolio, what would be your
choice?
![1.1. Refer to the following information on joint stock returns for stock 1, 2, and 3 in the
table:
Probability
Return for stock
Stock 1
Stock 2
Stock 3
0.20
0.20
0.25
0.10
0.30
-0.05
0.10
0.05
0.25
0.10
0.05
0.25
-0.10
-0.05
you must choose only two stocks to your investment portfolio, what would be your
choice?
If
a) stocks 1 and 2 b) stocks 1 and 3 c) stocks 2 and 3 d) other decision.
Present your arguments and calculations, to explain your decision.
[7]
1.2. Refer to the following observations for stock A and the market portfolio in the table:
Month
Rate of return
Stock A
Market portfolio
1
0,30
0,12
2
0.24
0,08
3
-0,04
-0,10
0,10
-0,02
5
0,06
0,08
6.
0,10
0,07
a) Calculate the main statistic measures to explain the relationship between stock A
and the market portfolio:
i) The sample covariance between rate of return for the stock A and the market.
[4]
ii) The sample Beta factor of stock A.
[3]
iii) The sample correlation coefficient between the rates of return of the stock A and
the market.
[3]
iv) The sample coefficient of determination associated with the stock A and the mar-
ket.
[4]
b) Draw in the characteristic line of the stock A and give the interpretation - what
[4]
does it show for the investor?
c) Calculate the sample residual variance associated with stock's A characteristic line
and explain how the investor would interpret the number of this statistic.
[4]
d) Do you recommend this stock for the investor with the lower tolerance of risk?
[3]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc1c80938-590c-440a-8370-09fc54f91561%2Fa706c6d2-6bb1-4047-a32a-760648328c38%2F9frbyig_processed.jpeg&w=3840&q=75)
Transcribed Image Text:1.1. Refer to the following information on joint stock returns for stock 1, 2, and 3 in the
table:
Probability
Return for stock
Stock 1
Stock 2
Stock 3
0.20
0.20
0.25
0.10
0.30
-0.05
0.10
0.05
0.25
0.10
0.05
0.25
-0.10
-0.05
you must choose only two stocks to your investment portfolio, what would be your
choice?
If
a) stocks 1 and 2 b) stocks 1 and 3 c) stocks 2 and 3 d) other decision.
Present your arguments and calculations, to explain your decision.
[7]
1.2. Refer to the following observations for stock A and the market portfolio in the table:
Month
Rate of return
Stock A
Market portfolio
1
0,30
0,12
2
0.24
0,08
3
-0,04
-0,10
0,10
-0,02
5
0,06
0,08
6.
0,10
0,07
a) Calculate the main statistic measures to explain the relationship between stock A
and the market portfolio:
i) The sample covariance between rate of return for the stock A and the market.
[4]
ii) The sample Beta factor of stock A.
[3]
iii) The sample correlation coefficient between the rates of return of the stock A and
the market.
[3]
iv) The sample coefficient of determination associated with the stock A and the mar-
ket.
[4]
b) Draw in the characteristic line of the stock A and give the interpretation - what
[4]
does it show for the investor?
c) Calculate the sample residual variance associated with stock's A characteristic line
and explain how the investor would interpret the number of this statistic.
[4]
d) Do you recommend this stock for the investor with the lower tolerance of risk?
[3]
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