Question 4Analyzing the stock market produces the following information about the returns of two stocks:Expected ReturnStandard DeviationStock 1-15%11%Stock 2-20%21%Assume that the returns are positively correlated, with correlation = 0.60.(0) Find the mean and standard deviation of the return on a portfolio consisting of anequal investment in each of the two stocks.Suppose that you wish to invest $1 million. Discuss whether you should invest yourmoney in stock 1, stock 2, or a portfolio composed of an equal amount of both stocks.

Portfolio Standard Deviation: Portfolio standard deviation represents the volatility of the…

Question 4 Analyzing the stock market produces the following information about the returns of two stocks: Expected Return Standard Deviation Stock 1 -15% 11% Assume that the returns are positively correlated, with correlation = 0.60. (0) (ii) Stock 2 -20% 21% Find the mean and standard deviation of the return on a portfolio consisting of an equal investment in each of the two stocks. Suppose that you wish to invest $1 million. Discuss whether you should invest your money in stock 1, stock 2, or a portfolio composed of an equal amount of both stocks.

Question 4 Analyzing the stock market produces the following information about the returns of two stocks: Expected Return Standard Deviation Stock 1 -15% 11% Assume that the returns are positively correlated, with correlation = 0.60. (0) (ii) Stock 2 -20% 21% Find the mean and standard deviation of the return on a portfolio consisting of an equal investment in each of the two stocks. Suppose that you wish to invest $1 million. Discuss whether you should invest your money in stock 1, stock 2, or a portfolio composed of an equal amount of both stocks.

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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Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock(b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 Required: 1. Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal investments in stocks P, P2 and P3 2.What are the factor risk exposures for the portfolio? 3.What is the portfolio’s expected return?
Consider the following information: State Probability Stock A Stock B Stock C Boom 0.32 0.17 -0.11 -0.06 Bust 0.68 -0.03 -0.01 0.23 What is the expected return of a portfolio that has invested $16,157 in Stock A, $19,654 in Stock B, and $9,659 in Stock C? (Hint: calculate weights of each stock first). Enter the answer with 4 decimals (e.g. 0.1234).
QUESTION 1 Consider the following information on stocks I and II: State of probability of Rate of Return if state Occurs state of Econ. Stock I Stock II 0.20 0.06 0.55 0.47 0.25 0.23 The market risk premium is 8%, and the risk free rate is 6%. Economy Recession Normal Boom a) Which stock has the most Systematic risk? b) Which one has the most unsystematic risk? c) Which stock is "riskier"? Explain. -0.25 0.11 0.68
Accounting Use the following information: Stock A B Good state 12% 17% Bad state 0% -1% Assume there is 60% probability that the good state occurs and 40% chance the bad state occurs. What is the expected return of a portfolio that is 9% invested in stock A and 1-9% invested in B? (Please use 5 decimal places, this should be written in percentage return, so an answer of 23.143% should be written at .23143)
1. If a stock has a(Alpha)=0.002, b(Beta)=1.4, Using the market model (eq. 7.4), find the expected percent return for the above stock if the market return is expected to be 2% and the risk free rate is 1%. 2. Assume stock prices follow a random walk and a particular stock has had the following recent stock prices: Day 1: 129.5 Day 2: 126.9 Day 3: 127.1 what is the best estimate of day 4 prices?
Consider the following data. Stock Standard Deviation Beta X 5% 1.37 Y 8% 0.61 To minimize risk, you should choose Stock _____ if held individually and Stock _____ if held as part of a well-diversified portfolio. X; Y Y; X There is not enough information to determine which stocks to hold. Y; Y X; X
Consider the following information: Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession .20 .010 −.35 Normal .55 .090 .25 Boom .25 .240 .48 Calculate the expected return for the two stocks. Calculate the standard deviation for the two stocks.
Consider the following stock return scenarios for three stocks: Stock Stock A B Economy Up Average Down 8% 5% 0% 2% 3% 4% Stock с 12% 0% -5% If each state of the economy is equally likely, calculate the expected return and population standard deviation for a portfolio invested entirely in Stock A. Which stock should be added to the portfolio to reduce risk?
Utilizing the information below on 2 recently purchased stocks, compute the risk of the portfolio for the different levels of correlation between the 2 securities: Stock A B Expected Return 0.14 0.17 Std Dev of returns 0.11 0.11 Proportion invested 0.35 0.65 Correlation coefficient 1 0.4 0.1 0 -0.4 -1
5 Assume the historical volatility of a stock on the S&P 500 is 50% and the correlation between the returns of stock is 30% A. What is the average variance of stocks on the S&P? B. What is the average covariance of the stocks? C. Consider a portfolio of S&P stocks. What is the estimated volatility of the portfolio when there 10 stocks in the portfolio? What about 20 stocks in the portfolio?
Stock A Stock B 1 0.09 0.06 2 0.05 0.01 3 0.15 0.05 4 5 -0.04 0.08 0.01 -0.04 a. What are the expected returns of the two stocks? b. What are the standard deviations of the returns of the two stocks? c. If their correlation is 0.44, what is the expected return and standard deviation of a portfolio of 59% stock A and 41% stock B?
Suppose you bought $48,000 worth of stock A and $80,000 worth of stock B. The standard deviation of returns is 59% for stock A and 27% for stock B. The two stocks' returns have a correlation of 0.2. What is the standard deviation of this portfolio's returns? a. 15.2% b. 18.6% c. 23.6% O d. 26.9% O e. 30.4% QUESTION 10

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