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 (σ A ) = 41% or 0.41 Standard deviation on Stock B (σ B ) = 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.

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Answer 1

Question

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

Scenario three: If a portfolio has a positive investment in every asset, can the expected return on a portfolio be greater than that of every asset in the portfolio? Can it be less than that of every asset in the portfolio? If you answer yes to one of both of these questions, explain and give an example for your answer(s). Please Provide a Reference

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Answer 2

Question

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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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Answer 3

Question

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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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Answer 4

Question

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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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Answer 5

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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.

Answer 6

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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.

Answer 7

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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.

Answer 8

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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.

Answer 9

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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.

Answer 10

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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.

Answer 11

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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.

Answer 12

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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.

Answer 13

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 (σ_A) = 41% or 0.41

Standard deviation on Stock B (σ_B) = 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.

Answer 14

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Answer 15

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Answer 16

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Answer 17

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 how to calculate the weight of Stock A and Stock B using the portfolio variance formula.

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Chapter 11 Solutions