QUESTION 9 Stock X has a standard deviation of 25 percent per year and stock Y has a standard deviation of 16 percent per year. The correlation between Stock X and Stock Y is zero. You have a portfolio of these two stocks wherein Stock X has a portfolio weight of 50 percent. What is your portfolio standard deviation? Use the portfolio variance formula TIPS: Min WB = 0²A-(0A x 0B PAB)[(02A + o2B)] -2(0A OB PAB) Since, PAB is zero, the above equation reduces to Minimum variance WB-02A/0²A+ PAB) 1-WB-weight -WA Use Portfolio variance after this point. COA 2.2% OB. 11.76% OC 14.84% OD None

QUESTION 9 Stock X has a standard deviation of 25 percent per year and stock Y has a standard deviation of 16 percent per year. The correlation between Stock X and Stock Y is zero. You have a portfolio of these two stocks wherein Stock X has a portfolio weight of 50 percent. What is your portfolio standard deviation? Use the portfolio variance formula TIPS: Min WB = 0²A-(0A x 0B PAB)[(02A + o2B)] -2(0A OB PAB) Since, PAB is zero, the above equation reduces to Minimum variance WB-02A/0²A+ PAB) 1-WB-weight -WA Use Portfolio variance after this point. COA 2.2% OB. 11.76% OC 14.84% OD None

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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Raghubhai
QUESTION 2 The following table contains data on the returns of stock A and stock B from 2021 to 2024: Year 2021 2022 2023 2024 Return on stock A 6 8 10 12 Return on stock B 13 10 14 11 1. Compute the mean return on stock A and the mean return on stock B; 2. Compute the variance of the return on stock A and the variance of the return on stock B; 8. Compute the standard deviation of the return on stock A and the standard deviation of the return on stock B; 4. Compute the coefficient of variation of the return on stock A and stock B; 5. Compute RRC for stock A and stock B (Hint: RRC = Mean Return/Standard Deviation); 6. Would you invest in Stock A or Stock B? Why?
Question 1. Calculate the variance and standard deviation of a portfolio of two stocks. Question 2. Suppose the volatility of stock 2 is 16%, but the weight of stock 2 in the portfolio is 15%, will there be any effect on the standard deviation of the portfolio?
None
Refer to the table below: 3 Doors, Inc. Down Co. Expected return, E(R) Standard deviation, o Correlation 15% 10% 30 18 0.39 Using the Information provided on the two stocks in the table above, find the expected return and standard deviation on the minimum variance portfolio. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Expected return % Standard deviation %
Problem 3: Suppose the market portfolio has an expected return of 10% and astandard deviation of returns of 25%. The risk-free rate is 5%. Assume that theCAPM holds.a) What is the expected return of a stock that has a beta of 2?b) If a stock has an expected return of 15% and a standard deviation ofreturns of 70%, what fraction of the stock’s variance representsidiosyncratic risk?c) What is the expected return of the “best” portfolio that has a standarddeviation of returns of 70%? That is, how high an expected return canyou get if you are willing to hold a portfolio with σp = 70%?
Problem 5 Assume that you manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate (risk-free rate) is 7%. Your client chooses to invest 70% in the risky portfolio in your fund and 30% in a T-bill money market fund. We assume that investors use mean-variance utility: U = E(r) – 0.5 x Aa?, where E(r) is the expected return, A is the risk aversion coefficient and o? is the variance of returns. a) What is the expected value and standard deviation of the rate of return on your client's portfolio? b) What is the reward-to-volatility ratio (Sharpe ratio) of your risky portfolio? What is the reward-to-volatility ratio (Sharpe ratio) of your client's risky portfolio? Comment on the relationship between these two Sharpe ratio calculated and explain the intuition behind. c) Draw the Capital Allocation Line (CAL) of your portfolio on an expected return- standard deviation diagram. What is the slope of the CAL? Show the position of your…
Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock C Boom .14 Bust .16 a. b. Stock B .58 .42 .22.40 .06-.05 What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What is the variance of a portfolio invested 22 percent each in A and B and 56 percent in C? (Do not round intermediate calculations and round your answer to 6 decimal places, e.g., .161616.)
Yogesh
Consider the following information: Probability of State of State of Economy Book Bust Economy 0.55 Variance Rate of Return if State Occurs Stock A Stock B 0.06 0.14 0.10 0.02 a. What is the expected return on an equally weighted portfolio of these three stocks? (Do not round intermediat Round the final answer to 2 decimal places.) Expected return b. What is the variance of a portfolio invested 25% each in A and B and 50% in C? (Do not round intermediate calc the final answer to 6 decimal places.) 10.65% Stock C 0.34 -0.07
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?
Vijay

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