Linda is analyzing a two-stock portfolio that consists of a utility stock and a commodity stock. She knows that the return on the utilitystock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 percent. However,she does not know the exact covariance of the returns of the two stocks. Linda would like to plot the variance of the portfolio for eachof three cases-covariance of 0.015, 0, and -0.015-in order to understand what the variance of the portfolio would be for a range ofcovariances. Do the calculation for all three cases (0.015, 0, and -0.015), assuming an equal proportion of each stock in the portfolio.Problem 7.21(a1)Case 1,01,2 = 0.015: (Round answer to 4 decimal places, e.g. 0.0768.)VarianceeTextbook and Media23E

An equal proportion is invested in each stock, therefore weight will be = 0.50Weight utility stock =…

Answered: Linda is analyzing a two-stock…

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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An investor puts 60% of her assets in a risky portfolio with an expected return of 15% and variance of .038. She puts the remaining 40% in T-bills that pay 3%. What are a.) the expected return and b.) the standard deviation of her portfolio?
An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 25% while the standard deviation on stock B is 15%. The correlation coefficient between the return on A and B is 0.40. What is the standard deviation of return on the minimum variance portfolio? Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
A portfolio consists of 500 equally weighted securities. The average variance of the securities is 0.09 and the average covariance between all pairs is 0.02. What is the standard deviation of the equal-weighted portfolio? 8.19% 6.19% 12.19% 14.19%
am. 124.
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Consider two stocks, Stock D, with an expected return of 13 percent and a standard deviation of 27 percent, and Stock I, an international company, with an expected return of 16 percent and a standard deviation of 44 percent. The correlation between the two stocks is -0.6. What is the weight of stock D in the minimum variance portfolio? (Do not round intermediate calculations. Round your answers to 4 decimal places.)
Asset X has an expected return of 6% and a variance of 0.001. Asset Y has an expected return of 12% and the same variance as X (i.e., 0.001). The returns of assets X and Y are uncorrelated, and the risk-free rate is 3%. Find the variance of the highest Sharpe ratio portfolio that can be formed of the two risky assets X and Y.
Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospective investments: X, Y, and Z. Assume that the measure of risk Sharon cares about is an asset's standard deviation. The expected returns and standard deviations of the investments are as follows: Investment Expected return Standard deviation X 17% 7% Y 17% 8% Z 17% 9% a. If Sharon were risk neutral, which investment would she select? Explain why. b. If she were risk averse, which investment would she select? Why? c. If she were risk seeking, which investments would she select? Why? d. Suppose a fourth investment, W, is available. It offers an expected return of 18%,and it has a standard deviation of 9%. If Sharon is risk averse, can you say which investment she will choose? Why or why not? Are there any investments that you are certain she will not choose?
Your employer has asked you to investigate the firm’s portfolio risk and return. The portfolio comprises three stocks. It is invested 50 percent in stock A, 30 percent in stock B and 20 percent in stock C. You gathered the following information: a) Determine what is the portfolio’s expected return b) Determine the portfolio’s variance and standard deviation c) Assume that the expected risk-free rate is 2.75 percent. Determine the expected risk premium on the portfolio.
Maroon has an expected return of 20%, and a variance of 0.015. Gray has an expected return of 19%, and a variance of 0.005. The covariance between Maroon and Gray is 0.06. Using these data, calculate the variance of a portfolio consisting of 30% Maroon and 70% Gray. 0.008000 .004710 .033000 .029000 .17029
Debra is analyzing a two stock portfolio that consists of a utility stock and a commondity stock. she knows that the return on the utility stock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 percent. however, she does not know the exact vocariance in the returns of the two stocks. debra would like to plot the variance of the portfolio for each of three cases - covariance of 0.100, 0, and -0.100 in order to understand what the variance of the portfolio would be for a range of covariances. do the calculation for all three cases (0.100,0, and -0.100) assuming an equal proportion of each stock in the portfolio. variance:______ coefficient:________ standard deviation:______

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