Q1) UPS, a delivery services company, has a beta of 1.1, and Wal-Mart has a beta of 0.7. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 30% of its money in UPS and the rest in Wal-Mart? Q2) IBM’s σ = 0.22; Dell’s σ = 0.13. The correlation between Dell and IBM is 0.32, and the weights are 50% each. Find the portfolio volatility (standard deviation). If the weights are now 30 % and 70 % for Dell and IBM respectively, how would the volatility of portfolio change? Briefly justify your answer.

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
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Q1)

UPS, a delivery services company, has a beta of 1.1, and Wal-Mart has a beta of 0.7. The risk-free rate of interest is 4% and the market risk premium is 7%. What is the expected return on a portfolio with 30% of its money in UPS and the rest in Wal-Mart?

Q2)

IBM’s σ = 0.22; Dell’s σ = 0.13. The correlation between Dell and IBM is 0.32, and the weights are 50% each.

  • Find the portfolio volatility (standard deviation).
  • If the weights are now 30 % and 70 % for Dell and IBM respectively, how would the volatility of portfolio change? Briefly justify your answer.
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