### Multiple Choice Question Example#### Instructions: Select the correct percentage from the options provided below:1. 17.9%2. 15.1%3. 19.5%4. 16.4%5. 17.2%#### Sidebar Menu- **Skipped**: Indicates the questions or sections that have been skipped.- **eBook**: Provides access to the electronic version of the textbook or related study materials.- **References**: Access to the reference materials and additional resources for further reading and study.### Description of Options:The screen shows a multiple choice question with five percentage options presented as follows:- **Option 1**: 17.9%- **Option 2**: 15.1%- **Option 3**: 19.5%- **Option 4**: 16.4%- **Option 5**: 17.2%Each option is accompanied by a radio button to indicate the selection choice. The interface allows the user to select only one correct option out of the given alternatives.Feel free to consult the eBook or References if you are unsure about the correct answer. ### Portfolio Allocation Analysis**Question 19**A portfolio analyst has been asked to allocate investment funds among three different stocks. The relevant data for the stocks is shown in the following table. The goal is to maximize return while maintaining risk within acceptable bounds (in this case, a portfolio standard deviation of no more than 20%). Find the proper allocation of the funds to each stock.#### Data Table:| Stock | Return (%) | Risk (Standard Deviation) (%) | Pair of Stocks | Joint Risk (Covariance) ||-------|------------|-------------------------------|----------------|-------------------------|| A | 20% | 25% | A to B | 0.6 || B | 15% | 15% | A to C | 0.05 || C | 12% | 12% | B to C | -0.05 |What is the expected return of the optimal stock portfolio?#### Multiple Choice:- [ ] 17%- [ ] 15.1%- [ ] 16%- [ ] 18.4%The task involves understanding the risk-return characteristics of each stock individually and their combined effect when blended into a portfolio. By doing so, the analyst can find an optimal allocation that maximizes returns while ensuring the overall portfolio risk does not exceed 20%. #### Explanation of Joint Risk (Covariance):- **Covariance** between stocks A and B: 0.6- **Covariance** between stocks A and C: 0.05- **Covariance** between stocks B and C: -0.05Covariance helps in determining how the stocks move together. A positive covariance indicates that the stocks move in the same direction, while a negative covariance indicates they move in opposite directions.By analyzing these figures, one would theoretically calculate the weights of each stock in the portfolio to find the highest expected return while constraining the portfolio’s standard deviation to 20%.

First let us note the formula used to determine the expected return and risk of the portfolio.

Answered: What is the expected return of the…

Business

Finance

What is the expected return of the optimal stock portfolio?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

See similar textbooks

Similar questions

PLEASE ANSWER ALL THE QUESTIONS Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items. Question 2 Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph Question 3 From the information generated in the previous two questions; a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50-50 investment allocation in each investment alternative. b) Compute the expected return of the portfolio thus formed. c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?
Question: A portfolio consists of two stocks: Stock Expected Return Standard Deviation Weight Stock 1 10% 15% 0.30 Stock 2 13% 20% ??? The correlation between the two stocks’ return is 0.50(a) Calculate the expected return and standard deviation of the portfolio. Expected Return: Standard Deviation: b) (i) Briefly explain, in general, when there would be “benefits of diversification” (for any portfolio of two securities). (ii) Describe whether the above portfolio would exhibit “benefits of diversification” (and why). [No calculations are required.] (c) Show your calculations re: whether the above portfolio exhibits “benefits of diversification”and indicate whether it does/doesn’t (and why).
Jason Jackson is attempting to evaluate two possible portfolios consisting of the same five assets but held in different proportions. He is particularly interested in using beta to compare the risk of the portfolios and, in this regard, has gathered the following data: LOADING... . a. Calculate the betas for portfolios A and B. b. Compare the risk of each portfolio to the market as well as to each other. Which portfolio is more risky? Question content area bottom Part 1 Data table (Click on the icon here in order to copy its contents of the data table below into a spreadsheet.) Portfolio Weights Asset Asset Beta Portfolio A Portfolio B 1 1.35 17% 29% 2 0.69 26% 8% 3 1.24 10% 22% 4 1.06 11% 20% 5 0.87 36% 21% Total 100% 100% a. The beta of portfolio A is enter your response here. (Round to three…
Qn4: Assume a two-stock portfolio created with $50,000 is invested in both HT and Collections. The expected returns are given below: Calculate the portfolio's return for each state of economy and fill them in the last column, under "Portfolio" (Hint: The portfolio's expected return is a weighted average of the returns of the portfolio's component assets). Calculate the portfolio's expected return (Hint: You have to incorporate the probability distribution of each state of economy). Calculate the portfolio's standard deviation. Economy Recession Below average Average Above average Boom Prob. HT 0.1 -27.0% 0.2 -7.0% 0.4 15.0% 0.2 30.0% 0.1 45.0% Coll 27.0% 13.0% 0.0% -11.0% -21.0% Portfolio
Question 1Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items. Question 2 Using the data generated in the previous question (Question 1)a) Plot the Security Market Line b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph
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…
Please answer part A-D and include a short explanation for each part of how you arrived at your answer. A) If a stock has a beta coefficient, b, equal to 2.2, the risk premium associated with the market is 9 percent, and the risk-free rate is 8.8 percent, application of the capital asset pricing model indicates the appropriate return should be: B) Steve Brickson currently has an investment portfolio that contains four stocks with a total value equal to $80,000. The portfolio has a beta (b) equal to 2.3. Steve wants to invest an additional $20,000 in a stock that has b = 4.5. After Steve adds the new stock to his portfolio, what will be the portfolio's beta? C) You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 2.2. You have decided to sell one of your stocks, a lead mining stock whose b =1.8, for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company whose b =3.7. What will be…
Problem 3 )As an equity analyst, you have developed the following return forecasts and risk estimates for two different stock mutual funds (Fund T and Fund U): Forecasted Return CAPM Beta Fund T 9.00% 1.20 Fund U 10.00% 0.80 If the risk-free rate (RFR) is 3.9% and the expected market risk premium (i.e., E(Ra) – RFR) is 6.1%, calculate the expected return for each mutual fund according to the 3.а. САРМ. 3.b. Decide which fund is overvalued, undervalued or properly valued and explain why?
financial advisor evaluates four stocks for inclusion in an investor's portfolio. A orrelation matrix showing each stock's correlation with the other stocks is shown below Stock ALK CMN BTY DLE ALK 0.40 0.58 1.00 -0.25 BTY 0.40 1.00 0.16 -0.04 CMN -.25 .16 1.00 .37 DLE .58 .04 .37 1.00 f the goal is to reduce the investor's overall portfolio risk, which two stocks should the advisor recommend? a. ALK and DLE b. ALK and CMN c. BTY and DLE BTY and CM
Question 3 a) You intend to construct a 2-asset portfolio. Three stock candidates are available with the following probability distribution of their returns: Return on Return on Return on Probability Stock X Stock Y Stock Z (%) (%) (%) 0.35 0.4 5 10 9 12 0.25 4 14 i) ii) How many 2-asset portfolio combinations can be created? Provide their names. Compute the covariance between the returns of various stock combinations Provide an estimate of correlation between returns of various stock combinations Which stocks emerges as the most ideal candidates to be held as a portfolio? Why? iv) b) “There is no alpha in an efficient markeť". In light of this statement, briefly describe market efficiency and its forms and why an investor may not be able to locate stocks that provide a positive alpha (undervalued stocks) consistently. (150 – 200 words)
Part II Question 1: You invest in a portfolio of 5 stocks with an equal investment in each one. The betas of the 5 stocks are as follows: .8, -1.3, .95, 1.2 and 1.4. The risk-free return is 3% and the market return is 7%. A. Compute the beta of the portfolio. B. Compute the required return of the portfolio. Question 2: You are given the following probability distribution for a stock: Probability Outcome .5 -6% .5 18% A) Compute the expected return . B) Compute the standard deviation. C) Compute the coefficient of variation.
Consider following information on a risky portfolio, risk-free asset and the market index. What is the T2 of the risky portfolio? Risky portfolio Risk-free asset Market index Average return 8.2% 2% 6% Std. Dev. 26% 20% Residual std. dev. 10% Alpha 1.4% Beta 1.2