Suppose Target's stock has an expected return of 20% and a volatility of 40%, Hershey's stock has an expected return of 10% and a volatility of 21%, and these two stocks are uncorrelated. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? Consider a new stock with an expected return of 15.0% and a volatility of 24%. Suppose this new stock is uncorrelated with Target's and Hershey's stock. b. Is holding this stock alone attractive compared to holding the portfolio in (a)? c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain.
Suppose Target's stock has an expected return of 20% and a volatility of 40%, Hershey's stock has an expected return of 10% and a volatility of 21%, and these two stocks are uncorrelated. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? Consider a new stock with an expected return of 15.0% and a volatility of 24%. Suppose this new stock is uncorrelated with Target's and Hershey's stock. b. Is holding this stock alone attractive compared to holding the portfolio in (a)? c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain.
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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Transcribed Image Text:Suppose Target's stock has an expected return of 20% and a volatility of 40%, Hershey's stock has an expected return of 10% and a volatility of 21%, and these two stocks are uncorrelated.
a. What is the expected return and volatility of an equally weighted portfolio of the two stocks?
Consider a new stock with an expected return of 15.0% and a volatility of 24%. Suppose this new stock is uncorrelated with Target's and Hershey's stock.
b. Is holding this stock alone attractive compared to holding the portfolio in (a)?
c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain.
...
a. What is the expected return and volatility of an equally weighted portfolio of the two stocks?
The expected return is %. (Round to one decimal place.)
The volatility is %. (Round to one decimal place.)
Consider
new stock with an expected return of 15.0% and a volatility of 24%. Suppose this new stock is uncorrelated with Target's and Hershey's stock.
b. Is holding this stock alone attractive compared to holding the portfolio in (a)? (Select the best choice below.)
O A. Yes, the new stock dominates Hershey, so you should hold this stock alone.
O B. No, Target dominates the new stock.
O C. No, a combination of the Hershey and Target stocks has the same expected return but with a lower volatility.
O D. Yes, the new stock dominates Target.
c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain. (Select the best choice below.)
O A. Yes, you are always better off holding the new stock than Hershey, so you should just replace Hershey with the new stock.
O B. Yes, but you should just hold the new stock by itself.
OC. No, although the new stock dominates Hershey, the portfolio of Hershey and Target dominates the new stock so there is no reason to hold it.
O D. Yes, by holding a combination of all 3 stocks you can reduce risk while leaving expected return unchanged.
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