CORPORATE FINANCE ACCESS CARD
CORPORATE FINANCE ACCESS CARD
12th Edition
ISBN: 2810023360184
Author: Ross
Publisher: MCG
Question
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Chapter 11, Problem 38QAP

a.

Summary Introduction

Adequate information:

Expected return on Stock A [E(R)A] = 10% or 0.10

Expected return on Stock B [E(R)B] = 16% or 0.16

Standard deviation on Stock A (σA) = 41% or 0.41

Standard deviation on Stock B (σB) = 77% or 0.77

Covariance between the returns of Stock A and Stock B [Cov (A, B)] = 0.001

To compute: The weight of Stock A and Stock B

Introduction: Portfolio weights refer to the percentage of each asset in the portfolio.

b.

Summary Introduction

Adequate information:

Expected return on Stock A [E(R)A] = 10% or 0.10

Expected return on Stock B [E(R)B] = 16% or 0.16

Standard deviation on Stock A (σA) = 41% or 0.41

Standard deviation on Stock B (σB) = 77% or 0.77

Covariance between the returns of Stock A and Stock B [Cov (A, B)] = 0.001

To compute: The expected return on the minimum variance portfolio.

Introduction: The expected return of a portfolio depicts the weighted average return of the stocks in that portfolio.

c.

Summary Introduction

Adequate information:

Expected return on Stock A [E(R)A] = 10% or 0.10

Expected return on Stock B [E(R)B] = 16% or 0.16

Standard deviation on Stock A (σA) = 41% or 0.41

Standard deviation on Stock B (σB) = 77% or 0.77

Covariance between the returns of Stock A and Stock B [Cov (A, B)] = -0.05

To compute: The weight of Stock A and Stock B.

Introduction: Portfolio weights refer to the weightage or proportion of each asset in the investment portfolio.

d.

Summary Introduction

Adequate information:

Expected return on Stock A [E(R)A] = 10% or 0.10

Expected return on Stock B [E(R)B] = 16% or 0.16

Standard deviation on Stock A (σA) = 41% or 0.41

Standard deviation on Stock B (σB) = 77% or 0.77

Covariance between the returns of Stock A and Stock B [Cov (A, B)] = -0.05

To compute: The variance of the portfolio.

Introduction: The standard deviation of a portfolio determines the unsystematic risk of the portfolio.

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