Adequate information: State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3 1 0.15 0.20 0.20 0.05 2 0.35 0.15 0.10 0.10 3 0.35 0.10 0.15 0.15 4 0.15 0.05 0.05 0.20 To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3. Introduction: Expected return simply refers to the return that is anticipated on the investment.

Question

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Answer 1

Question

Chapter 11, Problem 35QAP

a.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

b.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The covariance and correlations between the securities.

Introduction: The relationship between two securities is referred to as covariance.

c.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 2 (W₂) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Correlation between Security 1 and Security 2 (?₁_,₂) = 0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and a half in Security 2.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

d.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₃) = 0.0461 or 4.61%

Correlation between Security 1 and Security 3 (?₁_,₃) = -1

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

e.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 2 (W₂) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Expected return of Security 3 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Standard deviation of Security 3 (σ₃) = 0.0461 or 4.61%

Correlation between Security 2 and Security 3 (?₂_,₃) = -0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 2 and a half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

f.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: About diversification by considering Parts (a), (c), (d), (e).

Introduction: Correlation defines how two or more securities in the portfolio are related to each other.

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Answer 2

Question

Chapter 11, Problem 35QAP

a.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

b.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The covariance and correlations between the securities.

Introduction: The relationship between two securities is referred to as covariance.

c.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 2 (W₂) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Correlation between Security 1 and Security 2 (?₁_,₂) = 0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and a half in Security 2.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

d.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₃) = 0.0461 or 4.61%

Correlation between Security 1 and Security 3 (?₁_,₃) = -1

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

e.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 2 (W₂) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Expected return of Security 3 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Standard deviation of Security 3 (σ₃) = 0.0461 or 4.61%

Correlation between Security 2 and Security 3 (?₂_,₃) = -0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 2 and a half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

f.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: About diversification by considering Parts (a), (c), (d), (e).

Introduction: Correlation defines how two or more securities in the portfolio are related to each other.

Expert Solution & Answer

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Answer 3

Question

Chapter 11, Problem 35QAP

a.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

b.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The covariance and correlations between the securities.

Introduction: The relationship between two securities is referred to as covariance.

c.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 2 (W₂) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Correlation between Security 1 and Security 2 (?₁_,₂) = 0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and a half in Security 2.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

d.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₃) = 0.0461 or 4.61%

Correlation between Security 1 and Security 3 (?₁_,₃) = -1

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

e.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 2 (W₂) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Expected return of Security 3 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Standard deviation of Security 3 (σ₃) = 0.0461 or 4.61%

Correlation between Security 2 and Security 3 (?₂_,₃) = -0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 2 and a half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

f.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: About diversification by considering Parts (a), (c), (d), (e).

Introduction: Correlation defines how two or more securities in the portfolio are related to each other.

Expert Solution & Answer

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See solution

Answer 4

Question

Chapter 11, Problem 35QAP

a.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

b.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The covariance and correlations between the securities.

Introduction: The relationship between two securities is referred to as covariance.

c.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 2 (W₂) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Correlation between Security 1 and Security 2 (?₁_,₂) = 0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and a half in Security 2.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

d.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₃) = 0.0461 or 4.61%

Correlation between Security 1 and Security 3 (?₁_,₃) = -1

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

e.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 2 (W₂) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Expected return of Security 3 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Standard deviation of Security 3 (σ₃) = 0.0461 or 4.61%

Correlation between Security 2 and Security 3 (?₂_,₃) = -0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 2 and a half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

f.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: About diversification by considering Parts (a), (c), (d), (e).

Introduction: Correlation defines how two or more securities in the portfolio are related to each other.

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 5

Chapter 11, Problem 35QAP

a.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

b.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The covariance and correlations between the securities.

Introduction: The relationship between two securities is referred to as covariance.

c.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 2 (W₂) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Correlation between Security 1 and Security 2 (?₁_,₂) = 0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and a half in Security 2.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

d.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₃) = 0.0461 or 4.61%

Correlation between Security 1 and Security 3 (?₁_,₃) = -1

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

e.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 2 (W₂) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Expected return of Security 3 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Standard deviation of Security 3 (σ₃) = 0.0461 or 4.61%

Correlation between Security 2 and Security 3 (?₂_,₃) = -0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 2 and a half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

f.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: About diversification by considering Parts (a), (c), (d), (e).

Introduction: Correlation defines how two or more securities in the portfolio are related to each other.

Answer 6

Chapter 11, Problem 35QAP

a.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

Answer 7

Chapter 11, Problem 35QAP

a.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The expected return and standard deviation of Security 1, Security 2, and Security 3.

Introduction: Expected return simply refers to the return that is anticipated on the investment.

Answer 8

b.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The covariance and correlations between the securities.

Introduction: The relationship between two securities is referred to as covariance.

Answer 9

b.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: The covariance and correlations between the securities.

Introduction: The relationship between two securities is referred to as covariance.

Answer 10

c.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 2 (W₂) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Correlation between Security 1 and Security 2 (?₁_,₂) = 0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and a half in Security 2.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

Answer 11

c.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 2 (W₂) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Correlation between Security 1 and Security 2 (?₁_,₂) = 0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and a half in Security 2.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

Answer 12

d.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₃) = 0.0461 or 4.61%

Correlation between Security 1 and Security 3 (?₁_,₃) = -1

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

Answer 13

d.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 1 (W₁) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 1 [E(R₁)] = 0.1250 or 12.50%

Expected return of Security 2 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 1 (σ₁) = 0.0461 or 4.61%

Standard deviation of Security 2 (σ₃) = 0.0461 or 4.61%

Correlation between Security 1 and Security 3 (?₁_,₃) = -1

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 1 and half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

Answer 14

e.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 2 (W₂) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Expected return of Security 3 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Standard deviation of Security 3 (σ₃) = 0.0461 or 4.61%

Correlation between Security 2 and Security 3 (?₂_,₃) = -0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 2 and a half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

Answer 15

e.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

Weight of security 2 (W₂) = 50% or 0.50

Weight of security 3 (W₃) = 50% or 0.50

Expected return of Security 2 [E(R₂)] = 0.1250 or 12.50%

Expected return of Security 3 [E(R₃)] = 0.1250 or 12.50%

Standard deviation of Security 2 (σ₂) = 0.0461 or 4.61%

Standard deviation of Security 3 (σ₃) = 0.0461 or 4.61%

Correlation between Security 2 and Security 3 (?₂_,₃) = -0.59

To compute: The expected return and standard deviation of a portfolio if half of the funds are invested in Security 2 and a half in Security 3.

Introduction: Expected return on the portfolio refers to the return that is anticipated on the portfolio as a whole.

Answer 16

f.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: About diversification by considering Parts (a), (c), (d), (e).

Introduction: Correlation defines how two or more securities in the portfolio are related to each other.

Answer 17

f.

Summary Introduction

Adequate information:

State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3
1 0.15 0.20 0.20 0.05
2 0.35 0.15 0.10 0.10
3 0.35 0.10 0.15 0.15
4 0.15 0.05 0.05 0.20

To compute: About diversification by considering Parts (a), (c), (d), (e).

Introduction: Correlation defines how two or more securities in the portfolio are related to each other.

Answer 18

Expert Solution & Answer

Answer 19

Expert Solution & Answer

Answer 20

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Answer 21

Ch. 11 - Diversifiable and Nondiversifiable Risks In broad...Ch. 11 - Systematic versus Unsystematic Risk Classify the...Ch. 11 - Expected Portfolio Returns If a portfolio has a...Ch. 11 - Diversification True or false: The most important...Ch. 11 - Portfolio Risk If a portfolio has a positive...Ch. 11 - Beta and CAPM Is it possible that a risky asset...Ch. 11 - Covariance Briefly explain why the covariance of a...Ch. 11 - Prob. 8CQ Ch. 11 - Prob. 9CQ Ch. 11 - Prob. 10CQ

Solution Summary: The author explains the expected return and standard deviation of Security 1, Security 2, and Security 3.

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Chapter 11 Solutions

State	Probability of Outcome	Return on Security 1	Return on Security 2	Return on Security 3
1	0.15	0.20	0.20	0.05
2	0.35	0.15	0.10	0.10
3	0.35	0.10	0.15	0.15
4	0.15	0.05	0.05	0.20