Arbor Systems and Gencore stocks both have a volatility of 37%. Compute the volatility of a portfolio with 50% invested in each stock if the correlation between the stocks is (a) + 1.00, (b) 0.50, (c) 0.00, (d) – 0.50, and (e) - 1.00. In which of thecases is the volatility lower than that of the original stocks?If the correlation is + 1.00, the volatility of the portfolio is %. (Round to one decimal place.)If the correlation is 0.50, the volatility of the portfolio is %. (Round to one decimal place.)If the correlation is 0.00, the volatility of the portfolio is%. (Round to one decimal place.)If the correlation is - 0.50, the volatility of the portfolio is%. (Round to one decimal place.)If the correlation is - 1.00, the volatility of the portfolio is %. (Round to one decimal place.)In which of the cases is the volatility lower than that of the original stocks? (Select the best choice below.)A. In all of the cases.B. In cases (b), (c), (d) and (e).C. In none of the cases.O D. In cases (d) and (e).

Stock Volatility is the fluctuation in the prices of the stock on either upside or downside.

In which of the cases is the volatility lower than that of the original stocks? (Select the best choice below.) O A. In all of the cases. O B. In cases (b), (c), (d) and (e). OC. In none of the cases. OD. In cases (d) and (e).

In which of the cases is the volatility lower than that of the original stocks? (Select the best choice below.) O A. In all of the cases. O B. In cases (b), (c), (d) and (e). OC. In none of the cases. OD. In cases (d) and (e).

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6P

See similar textbooks

Related questions

Q: f four stocks A, B, C and D have coefficients of variation of 1.80, 2.00, 1.55 and 1.35,…

A: Coefficient of Variation(CV) measures the risk per unit of return.Coefficient of Variation(CV) =…

Q: If the fair value of a stock is more than its market value, which of the following is a reasonable…

A: Fair value of a stock is also known as its intrinsic value.Intrinsic value of a stock is the present…

Q: 7. If the point representing a stock's return and risk is above the security market, then_ B. the…

A: The stock has a higher return and higher risk compared to the average return and risk of the…

Q: Efficient frontier 1 excludes international stocks. Efficient frontier 2 includes everything in…

A: The efficient frontier is a graph that depicts the portfolios with the highest expected return for a…

Q: For a price-weighted index, when a lower-price stock is replaced by a higher- price stock, which of…

A: As per this method of price-weighted index, the stock price added by each company according to its…

Q: Axon Bank has assets of $10 million comprising loans and Treasury bonds. The average duration of…

A: The duration gap is the difference between the duration of assets and liabilities. It is a metric…

Q: For a price-weighted index, when a lower-price stock is replaced by a higher-price stock, which of…

A: One common type of stock market index is the price-weighted index, where stocks are weighted based…

Q: Tick all those statements on options that are correct (and don't tick those statements that are…

A: Two categories of financial derivatives are call and put options, which provide the holder the…

Q: When investing for a long term, investors care about the volatility of A. mean, average B. mean,…

A: Volatility is used to measure the tendency of security in stock exchange wherein the security price…

Q: A class of Efficient Market Hypothesis that implies all public information is calculated into a…

A: Efficient Market Hypothesis is the market theory which depicts that market is generally efficient…

Q: Which of the following statements about event studies is/are true? (a) Event time is measured…

A: Several statements have been provided. We have to find the ones that are correct.

Q: There is a --- impact of earnings on stock prices O a. Deductive O b. Positive O c. Normative O d.…

A: Earnings, also known as net income or profit, represent the amount of money a company has left over…

Q: Ex) Explain why do we use different Brownian motions for the stock price S(t) and X(t) in the…

A: In the Feynmann-Kac representation formula, Brownian motion is used to model the random evolution of…

Q: Which of the following describes delta? The ratio of the option price to the stock price None of…

A: The simplest form of delta hedging entails an investor purchasing or disposing of options, and then…

Q: 7

A: Solow Model : The Solow Growth Model is an exogenous economic growth model that examines changes in…

Q: If there is a stock which is substantially overvalued, where it should plot relatively to the SML?…

A: SML or Security Market Line:- It is an graphical representation of CAPM model. SML graph is being…

Q: Fill in the blanks: Stock returns can be explained by the stock's and the stock's A. beta; market…

A: stock return cam be calculated using Capital asset pricing model or dividend discount model.

Q: Problem 4d: State whether the following statements are true or false. In each case, provide a brief…

A: Options are derivative contracts in which the option holder has an option to buy or sell the…

Q: The greater the volatility of the underlying stock, the higher; lower lower; higher higher; higher…

A: The greater the volatility of the underlying stock, the higher the premiums for both call and put…

Q: Consider the following regression Pt * - Pt = .07(1.4) + .4*Pt (3.6) + et where Pt * is Shiller’s ex…

A: The efficient markets theory is a theoretical framework that explains the functioning of financial…

Q: What impact does each of the followingparameters have on the value of a call option?(5) Variability…

A: A call option provides certain rights to an individual regarding purchasing any stock at a strike…

Q: JESTION 2 u plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to…

A: Present value is an estimate of the present value of future cash values that may be received at a…

Q: Under which of the following circumstances would you want to buy a stock? Select one: a. The HPR is…

A: Stock also known as share or equity represent a part of ownership in a publicly traded company. When…

Q: Which of the following is true? a. Beta of a stock cannot be negative b. SML is an acronym for Stock…

A: Investors in the stock market need to have a strong understanding of various concepts related to…

Q: at is the correct way to determine the value of a long forward position at expiration? The value is…

A: Foward contracts are that are settled in the future times and they are settled on the margins and…

Q: 4. How the Stock valuation is normally made? Cost or net realizable value whichever is more Cost and…

A: Stock valuation is the process of analyzing the intrinsic worth of the stock possessed by the entity…

Q: Describe two conditions which will determine whether or not a stock is in equilibrium. Can either of…

A: Equilibrium refers to a state of rest or a situation where demand is equal to supply. At point of…

Q: Which of the following is true for testing stock price predictability? Select one: O a. All of the…

A: Answer- Option (A) = All the above options. The forecast of the stock market is the act of trying…

Q: risk premium: (a) The risk premium indicates the amount of compensation investors require for…

A: Market risk premium or the risk premium is the extra returns that is required by the invester for…

Q: alue of a stock is less than the current market price, I should ________________ the stock since it…

A: In the stock market prices of stocks are changing and are not fixed and sometimes go up and…

Q: Use the following three statements to answer this question: 1. Risk means the probability that the…

A: 1 Statement:- Risk is the chance or the outcome of the difference between the initial investment…

Q: Higher a stock’s volatility, why does the higher the probability of large increases or decreases in…

A: Stock Volatility: Volatility is defined as a statistical measure of the dispersion of the returns…

Q: In a binomial tree created to value an option on a stock, what is the expected return on the option?…

A: The binomial tree model is a commonly used method in finance for valuing options and other financial…

Q: 3) Understanding if a stock is undervalued or overvalued will influence if the investor will invest…

A: Overvaluation of a stock occurs when its market price surpasses its intrinsic value, meaning it is…

Q: Which of the following techniques is used to value stock options? a. Black-Scholes method b.…

A: black scholes method is used to value options

Q: All else equal, a higher required rate of return would reduce the price of: I. Corporate bonds II.…

A: Required rate of return is the rate of return that an investor expects as a consideration for…

Q: pose stocks X and Y have equal current prices but different volatilities of returns, ax < øy; what…

A: Value of call option depends on the underlying prices and the volatilities of stock return because…

Q: Which of the following statements are true assuming that all assets satisfy CAPM? a) Low-beta…

A: CAPM (Capital Asset Pricing Model) is a financial model used to determine expected return on an…

Q: Is the following statement correct, wrong or partially correc? Why? "If the volatility of Stock A is…

A: This statement is CORRECT.

Q: Which of those represent a correct relationship between the present value of the payments that the…

A: The price of a stock is determined by taking the sum of its future expected dividend payments…

Q: Which of the following is true? O A call on a stock plus a stock the same as a put O Along call is…

A: Several statements have been given about positions in call and put. We have to find the correct one.

Q: Based on the information in the previous question, Stock Z is currently... Group of answer choices…

A: In the previous question, the given conditions are;Stock Z return is 9.3% and beta is 1.22 Market…

Q: for your explaination on the second one, i think you mean the answer is B. as you stated it will…

A: The expected return on high beta stock will be generally decreased because their beta generally…

Q: binomial model account of volatility

A: Volatility is simply referred to as the uncertainty or risk in the change in the value of a…

Q: Which of the following statements is CORRECT? a. Lower beta stocks have higher required returns.…

A: The objective of the question is to identify the correct statement among the given options related…

Concept explainers

Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.

Question

100%

Arbor Systems and Gencore stocks both have a volatility of 37%. Compute the volatility of a portfolio with 50% invested in each stock if the correlation between the stocks is (a) + 1.00, (b) 0.50, (c) 0.00, (d) – 0.50, and (e) - 1.00. In which of the
cases is the volatility lower than that of the original stocks?
If the correlation is + 1.00, the volatility of the portfolio is %. (Round to one decimal place.)
If the correlation is 0.50, the volatility of the portfolio is %. (Round to one decimal place.)
If the correlation is 0.00, the volatility of the portfolio is
%. (Round to one decimal place.)
If the correlation is - 0.50, the volatility of the portfolio is
%. (Round to one decimal place.)
If the correlation is - 1.00, the volatility of the portfolio is %. (Round to one decimal place.)
In which of the cases is the volatility lower than that of the original stocks? (Select the best choice below.)
A. In all of the cases.
B. In cases (b), (c), (d) and (e).
C. In none of the cases.
O D. In cases (d) and (e).

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

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.

Similar questions

An analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?
Arbor Systems and Gencore stocks both have a volatility of 44%. Compute the volatility of a portfolio with 50% invested in each stock if the correlation between the stocks is (a) +1.00, (b) 0.50, (c) 0.00, (d) - 0.50, and (e) - 1.00. In which of the cases is the volatility lower than that of the original stocks? If the correlation is +1.00, the volatility of the portfolio is%. (Round to two decimal place.)
Please complete in Excel (and show work)
Assume that the CAPM holds. One stock has an expected return of 8% and a beta of 0.3. Another stock has an expected return of 14% and a beta of 1.5. What is the return-to-risk ratio that CAPM assumes equal across all individual stocks?
Suppose 0.3 is the correlation of returns between any two stocks in an equal-weighted portfolio containing N stocks. Suppose the volatility of any stock is 25%. Calculate the volatility of a portfolio with · N = 24 stocks · N = 100 stocks · N = infinite stocks
Suppose the beta estimated from the CAPM for stock A is 2.3 and stock B is 1.1. What is the beta of an equally weighted stock portoflio of A and B stock?
The index model for stocks A and B is estimated from excess return with the following results: RA = -0.01 +0.8RM RB = 0.04 + 1.1RM R-squared 4 = 0.15 R-squared B = 0.3 Market-index risk (oM) is 0.2
Consider a stock portfolio consisting of two units of S' and one unit of S2. Calculate the probability of delta losses over one day, if the daily log-returns (X1, X2) of the stocks are independent with X1 are S = 100, S = 50. N(0.5, 1.1), X2 N(-0.2,0.5) and the current stocks value
Assume you have invested in two other stocks: Stock A has a beta of 1.20 and Stock B has a beta of 0.8. Rf= 2% and Rm = 12%. Using CAPM, what are the expected returns for each stock? Return of stock = Risk free rate + beta ( market rate of return - risk free rate of return) Return of Stock A = 2% + 1.20 (12% - 2%) = 2.12% Return of Stock B = 2% + 0.80 (12% - 2%) = 2.08% What is the expected return of an equally weighted portfolio of these two stocks? Weight of stock A = 0.50 Weight of Stock B = 0.50 Expected return = (Return of Stock A * weight of Stock A) + (Return of Stock B * weight of stock B) = (2.12 * 0.50) + (2.08*0.50) = 1.06 + 1.04 = 3% What is the beta of an equally weighted portfolio of these two stocks? Beta of portfolio = (Beta of Stock A * weight of stock A) + (Beta of Stock B * weight of Stock B) = (1.20*0.50) + (0.80*0.50) = 0.60 + 0.40 = 1 Beta of portfolio = 1 (iv) Sketch the SML to represent the…
Suppose that the index model for stocks A and B is estimated from excess returns with the following results:RA = 3% + .7RM + eARB = −2% + 1.2RM + eBσM = 20%; R-squareA = .20; R-squareB = .12What is the covariance between each stock and the market index?
Assume you have invested in two other stocks: Stock A has a beta of 1.20 and Stock B has a beta of 0.8. Rf= 2% and Rm = 12%. (i) Using CAPM, what are the expected returns for each stock? Return of stock = Risk free rate + beta ( market rate of return - risk free rate of return) Return of Stock A = 2% + 1.20 (12% - 2%) = 2.12% Return of Stock B = 2% + 0.80 (12% - 2%) = 2.08% (ii) What is the expected return of an equally weighted portfolio of these two stocks? Weight of stock A = 0.50 Weight of Stock B = 0.50 Expected return = (Return of Stock A * weight of Stock A) + (Return of Stock B * weight of stock B) = (2.12 * 0.50) + (2.08*0.50) = 1.06 + 1.04 = 3% (iii) What is the beta of an equally weighted portfolio of these two stocks? Beta of portfolio = (Beta of Stock A * weight of stock A) + (Beta of Stock B * weight of Stock B) = (1.20*0.50) + (0.80*0.50) = 0.60 + 0.40 = 1 Beta of portfolio = 1 (iv) Sketchthe SML to…
Suppose that the index model for stocks A and B is estimated from excess returns with the following results: RA = 0.03 + 0.7 RM + eA RB = -0.02+ 1.2 RM + eB σM =0.20; R-square A = 0.25 R-square B = 0.20 What is the standard deviation of A & B, respectively? Group of answer choices 0.54, 0.28 0.28, 0.54 0.45, 0.50 0.50, 0.45