Question 1 a. Explain why it is important to have diversification in a portfolio. b. The following table represents a portfolio of two (2) assets: State of Probability of Return of Return of Nature State of Stock A Stock B Nature under under Different Different State of State of Nature Nature Boom 0.3 20% 25% Normal 0.5 10% 20% Recession 0.2 5% 10% i. What is the expected return on Stock A and Stock B? ii. What is the standard deviation of returns of Stock A and Stock B? iii. Which Stock is more volatile? c. Suppose you use J$100 000 to construct a portfolio comprising of Stock A and stock B, such that you invest J$30 000 and J $70 000 in Stock A and Stock B respectively. Also you have done some research and estimated the Beta (B) of the Stocks to be: Stock A=0.75 and Stock B-0.50. Use the expected returns calculated for each stock in (b), above to calculate the following: i. The expected return on the portfolio ii. Calculate the expected beta of the portfolio. iii. Explain briefly how you would approach diversitying this portfolio.
Question 1 a. Explain why it is important to have diversification in a portfolio. b. The following table represents a portfolio of two (2) assets: State of Probability of Return of Return of Nature State of Stock A Stock B Nature under under Different Different State of State of Nature Nature Boom 0.3 20% 25% Normal 0.5 10% 20% Recession 0.2 5% 10% i. What is the expected return on Stock A and Stock B? ii. What is the standard deviation of returns of Stock A and Stock B? iii. Which Stock is more volatile? c. Suppose you use J$100 000 to construct a portfolio comprising of Stock A and stock B, such that you invest J$30 000 and J $70 000 in Stock A and Stock B respectively. Also you have done some research and estimated the Beta (B) of the Stocks to be: Stock A=0.75 and Stock B-0.50. Use the expected returns calculated for each stock in (b), above to calculate the following: i. The expected return on the portfolio ii. Calculate the expected beta of the portfolio. iii. Explain briefly how you would approach diversitying this portfolio.
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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Please note I want ONLY part c of this question to be answered. I removed part b and I was instructed to send part b as the paper look incomplete.
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Transcribed Image Text:Question 1
a. Explain why it is important to have diversification in a portfolio.
b. The following table represents a portfolio of two (2) assets:
State of
Probability of
Return of
Return of
Nature
State of
Stock
Stock B
Nature
under
under
Different
Different
State of
State of
Nature
Nature
Вoom
0.3
20%
25%
Normal
0.5
10%
20%
Recession
0.2
5%
10%
i. What is the expected return on Stock A and Stock B?
ii. What is the standard deviation of returns of Stock A and Stock
B?
iii. Which Stock is more volatile?
c. Suppose you use J$100 000 to construct a portfolio comprising of Stock
A and stock B,
such that you invest J$30 000 and J $70 000 in Stock A and Stock B
respectively. Also
you have done some research and estimated the Beta (B) of the Stocks to
be: Stock
A=0.75 and Stock B=0.50.
Use the expected returns calculated for each stock in (b), above to
calculate the following:
i. The expected return on the portfolio
ii. Calculate the expected beta of the portfolio. ,
iii. Explain briefly how you would approach diversifying this
portfolio.
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