Portfolio theory with three assets Estimated covariances between three stocks are shown in the following table. The expected returns for the three stocks are 11% (A), 9% (B) and 4% (C), respectively A B C A 0.0225 0.0030 -0.0009 B 0.0030 0.0100 -0.0012 -0.0009 -0.0012 0.0036 Note: All returns and covariance matrix are on an annual basis A) Calculate the expected return and standard deviation of the portfolio if it is equally split between A and B B) Calculate the expected return and standard deviation of the portfolio if it is equally split between A,B and C C) Compare the portfolio in answer (a) and the portfolio in answer (b) using the sharpe ratio. Assuming the current annual risk-free rate is 3%
Portfolio theory with three assets Estimated covariances between three stocks are shown in the following table. The expected returns for the three stocks are 11% (A), 9% (B) and 4% (C), respectively A B C A 0.0225 0.0030 -0.0009 B 0.0030 0.0100 -0.0012 -0.0009 -0.0012 0.0036 Note: All returns and covariance matrix are on an annual basis A) Calculate the expected return and standard deviation of the portfolio if it is equally split between A and B B) Calculate the expected return and standard deviation of the portfolio if it is equally split between A,B and C C) Compare the portfolio in answer (a) and the portfolio in answer (b) using the sharpe ratio. Assuming the current annual risk-free rate is 3%
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
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
Transcribed Image Text:Portfolio theory with three assets
Estimated covariances between three stocks are shown in the following table. The expected returns
for the three stocks are 11% (A), 9% (B) and 4% (C), respectively
A
B
C
A
0.0225
0.0030
-0.0009
B
0.0030
0.0100
-0.0012
-0.0009
-0.0012
0.0036
Note: All returns and covariance matrix are on an annual basis
A) Calculate the expected return and standard deviation of the portfolio if it is equally split between
A and B
B) Calculate the expected return and standard deviation of the portfolio if it is equally split between
A,B and C
C) Compare the portfolio in answer (a) and the portfolio in answer (b) using the sharpe ratio.
Assuming the current annual risk-free rate is 3%
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