You have a portfolio that is comprised of 40% of Stock A and 60% of Stock B. What is the variance of the portfolio? State of the Economy Normal Recession Multiple Choice O O O O 101.64% 102.13% 106.84% 107.15% 108.93% Probability .7 .3 E (RA) 40% 12% -7% E (RB) 60% 14% -10%

You have a portfolio that is comprised of 40% of Stock A and 60% of Stock B. What is the variance of the portfolio? State of the Economy Normal Recession Multiple Choice O O O O 101.64% 102.13% 106.84% 107.15% 108.93% Probability .7 .3 E (RA) 40% 12% -7% E (RB) 60% 14% -10%

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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Question

You have a portfolio that is comprised of 40% of Stock A and 60% of Stock B. What is the variance of the portfolio?
State of the Economy
Normal
Recession
Multiple Choice
O
O
O
101.64%
102.13%
106.84%
107.15%
108.93%
Probability
.7
.3
E(RA) E(RB)
40%
60%
12%
14%
-7% -10%

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Portfolio Expected return Standard deviation Q 7.8% 10.5% R 10.0% 14.0% S 4.6% 5.0% T 11.7% 18.5% U 6.2% 7.5% (Q1) For each portfolio, calculate the risk premium per unit of risk (Sharpe ratio) that you expect to receive. Assume that the risk-free rate is 3.0%. (Q2) Using answers from Q1, which of these five portfolios is most likely to be the market portfolio and explain why. (200 words maximum)
Portfolio Expected return Standard deviation Q 7.8% 10.5% R 10.0% 14.0% S 4.6% 5.0% T 11.7% 18.5% U 6.2% 7.5% Q) If you are only willing to make an investment with a standard deviation of 7.0%, is it possible for you to earn a return of 7.0%?
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?
Consider the following scenario analysis: Scenario Recession Normal economy Boom Required A Probability 0.3 0.4 0.3 Assume a portfolio with weights of 0.60 in stocks and 0.40 in bonds. a. What is the rate of return on the portfolio in each scenario? b. What are the expected rate of return and standard deviation of the portfolio? Rate of Return Stocks Bonds 12% 7 3 Complete this question by entering your answers in the tabs below. Required B Expected return Standard deviation -4% 13 22 What are the expected rate of return and standard deviation of the portfolio? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places % %
None
% Return on T-Bills, Stocks and Market Index States of Economy Probability T-Bills Phillips Pay-up Rubber-Made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean 7 16.9 20.7 19.6 15 Variance (%) ^2 0 549.09 244.124 358.04 313.6 Standard Deviation 0 23.4326695 15.6244712 18.92194493 17.7087549 Coefficient of Variation 0 1.386548491 7.54805372 0.965405354 1.18058366 Covariance wit MP 0 .0413 -.0275 .0231 .0314 Correlation with Market Index 0 0.9953 -0.9953 0.6894 1.0000 Beta 0 1.32 - 0.88 0.74 1.00 CAPM Req. Return 7.00 % 17.54 % -0.02% 12.89% 15.00% Valuation ( Overvalued / Undervalued/Fairly Valued) Valued Fairly…
None
Consider the following information: State of Economy Recession Expected return Normal .60 Boom 20 Calculate the expected return for Stock A. Expected return Probability of State of Economy Calculate the expected return for Stock B. Standard deviation 20 8.40% 8.02% 8.82% 7.95% 8.74% Standard deviation Calculate the standard deviation for Stock A. 10.20% 8.33% 10.71% 9.69% 10.61% 2.94% 2.08% 3.09% 2.79% 3.06% Calculate the standard deviation for Stock B. 17.42% 12.32% 18.29% 16.55% 18.11% Rate of Return if State Occurs Stock A .03 .09 12 Stock B -.21 N 13 33
State of Nature Recession Expansion Probability 70% 30% State Dependent Return A -.08 .28 State Dependent Return B -.04 .16 Given the data in the table above, what comes closest to the standard deviation of Stock A and the standard deviation of Stock B? A. The standard deviation of Stock A = .10 and the standard deviation of Stock B = .1033 B. The standard deviation of Stock A = .10 and the standard deviation of Stock B = .0917 C. The standard deviation of Stock A = .02 and the standard deviation of Stock B =.1033 D. The standard deviation of Stock A = .0000 and the standard deviation of Stock B = .0000 O E. The standard deviation of Stock A = .1650 and the standard deviation of Stock B =.0917
ff2
You decide to invest in a portfolio consisting of 24 percent Stock A, 50 percent Stock B, and the remainder in Stock C. Based on the following information, what is the variance of your portfolio? state of Economy Recession Normal Boon Multiple Choice 00842 01137 00783 00884 00951 Probability of State of Economy .117 .671 .212 Return if State Occurs Stock A -10.40% 9.70% 21.61% Stock B. Stock C -3.80% -12.80% 10.72% 17.20% 25.23% 29.93%
a 0.07248 b 0.00386 c 0.26921 d 0.00939 e 0.05175

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