Suppose that Jerry Tan has surplus funds to invest in both stocks, Alpha and Beta. He has decided to form a portfolio with investment in both stocks. The correlation coefficient between the expected return of both stocks is 0.8 and the weightage of investment is 40% for Stock Alpha and 60% for Stock Beta. Required: (i) Compute the expected return of the portfolio. (ii) Compute the variance of the portfolio. (iii) Compute the standard deviation of the portfolio.
Suppose that Jerry Tan has surplus funds to invest in both stocks, Alpha and Beta. He has decided to form a portfolio with investment in both stocks. The correlation coefficient between the expected return of both stocks is 0.8 and the weightage of investment is 40% for Stock Alpha and 60% for Stock Beta. Required: (i) Compute the expected return of the portfolio. (ii) Compute the variance of the portfolio. (iii) Compute the standard deviation of the 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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Suppose that Jerry Tan has surplus funds to invest in both stocks, Alpha and Beta. He has decided to form a portfolio with investment in both stocks. The correlation coefficient between the expected return of both stocks is 0.8 and the weightage of investment is 40% for Stock Alpha and 60% for Stock Beta.
Required:
(i) Compute the expected return of the portfolio.
(ii) Compute the variance of the portfolio.
(iii) Compute the standard deviation of the portfolio.
Transcribed Image Text:Jerry Tan is considering two mutually exclusive investments: Stock Alpha and Stock Beta.
There are three equally likely outcomes for the economy: a recession, normal growth, and a
boom. The probabilities of the three outcomes are equally likely, and the rate of return of
Stock Alpha and Stock Beta are as follows:
(a)
Stock Alpha
Stock Beta
Outcome
Return (%)
Outcome
Return (%)
Recession
Normal Growth
8
Recession
15
20
Normal
20
Boom
25
Boom
40
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