Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
3rd Edition
ISBN: 9780133507676
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 12, Problem 11P
Using the spreadsheet from Problem Il and the fact that Cola Co. and Gas Co. have a correlation of 0.6083, calculate the volatility (standard deviation) of a portfolio thatis 55% invested in Cola co. stock and 45% invested in Gas Co. stock. Calculate the volatility by
a. Using Eq. 12.4.
b. Calculating the monthly returns of the portfolio and computing its volatility directly.
c. How do your results compare?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Using the data in the following table,
LOADING...
,
consider a portfolio that maintains a
75% weight on stock A and a
25% weight on stock B.
a. What is the return each year of this portfolio?
b. Based on your results from part
(a),
compute the average return and volatility of the portfolio.
c. Show that (i) the average return of the portfolio is equal to the (weighted) average of the average returns of the two stocks, and (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.9.
d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks.
Question content area bottom
Part 1
a. What is the return each year of this portfolio?
Enter the return of this portfolio for each year in the table below: (Round to two decimal places.)
Year
2010
2011
2012
2013
2014
2015
Portfolio
enter your response here%
enter your response here%
enter your response…
Need all
Using the data in the following table, consider a portfolio that maintains a 60% weight on stock A and a 40% weight on stock B.
a. What is the return each year of this portfolio?
b. Based on your results from part (a), compute the average return and volatility of the portfolio.
c. Show that (i) the average return of the portfolio is equal to the (weighted) average of the average returns of the two stocks, and (ii) the volatility of the portfolio equals the same result as from the
calculation in Eq. 11.9.
d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks.
a. What is the return each year of this portfolio?
Enter the return of this portfolio for each year in the table below: (Round to two decimal places.)
Year
2012
Portfolio
%
2010
%
2011
%
b. Based on your results from part (a), compute the average return and volatility of the portfolio.
The average return of the portfolio is%. (Round to two decimal places.)
2013
%
2014
%
2015
%
The…
Chapter 12 Solutions
Fundamentals of Corporate Finance (3rd Edition) (Pearson Series in Finance)
Ch. 12 - Prob. 1CCCh. 12 - How is the expected return of a portfolio related...Ch. 12 - What determines how much risk will be eliminated...Ch. 12 - When do stocks have more or less correlation?Ch. 12 - What is the market portfolio?Ch. 12 - Prob. 6CCCh. 12 - Prob. 7CCCh. 12 - Prob. 8CCCh. 12 - Prob. 1CTCh. 12 - What does correlation tell us?
Ch. 12 - Prob. 3CTCh. 12 - What does beta measure? How do we use beta?Ch. 12 - Prob. 5CTCh. 12 - Prob. 6CTCh. 12 - You buy 100 shares of Tidepool Co. for $40 each...Ch. 12 - You buy 100 shares of Tidepool Co. for $40 each...Ch. 12 - Prob. 3PCh. 12 - You have $70,000. You put 20% of your money in a...Ch. 12 - 6. There are two ways to calculate the expected...Ch. 12 - Prob. 6PCh. 12 - 8. Stocks A and B have the following returns (see...Ch. 12 - 9. Using the data in the following table, estimate...Ch. 12 - Using your estimates from Problem 9 and the fact...Ch. 12 - Prob. 10PCh. 12 - Using the spreadsheet from Problem Il and the fact...Ch. 12 - 13. Using the data in Table 12.2,
Compute the...Ch. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Prob. 18PCh. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Prob. 22PCh. 12 - Prob. 23PCh. 12 - Prob. 24PCh. 12 - Prob. 25PCh. 12 - Prob. 26PCh. 12 - Prob. 27PCh. 12 - Prob. 28PCh. 12 - Prob. 29PCh. 12 - Prob. 30PCh. 12 - Prob. 31PCh. 12 - Prob. 32PCh. 12 - Prob. 33PCh. 12 - Prob. 34P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Using the data in the following table,, consider a portfolio that maintains a 50% weight on stock A and a 50% weight on stock B a. What is the return each year of this portfolio? b. Based on your results from part (a), compute the average return and volatility of the portfolio. c. Show that (i) the average return of the portfolio is equal to the (weighted) average of the average returns of the two stocks, and (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.8. d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks. a. What is the return each year of this portfolio? Enter the return of this portfolio for each year in the table below (Round to two decimal places.) Year Portfolio Data table 2010 % 2011 % 2012 % 2013 % (Click on the following icon in order to copy its contents into a spreadsheet.) 2014 2015 %1 1% Year 2010 2011 2012 2013 2014 2015 Stock A -10% 20% 5% 5% 2% 9% Stock B 21% 7% 30% -3% 8%…arrow_forwardUsing the data in the following table, and the fact that the correlation of A and B is 0.62, calculate the volatility (standard deviation) of a portfolio that is 80% invested in stock A and 20% invested in stock B. (Click on the following icon in order to copy its contents into a spreadsheet.) Year 2008 2009 2010 2011 2012 2013 Realized Returns Stock A - 8% 17% 5% - 8% 4% 7% Stock B 17% 39% 11% - 1% - 5% 17% The standard deviation of the portfolio is %. (Round to two decimal places.)arrow_forwarda) Compute the expected return for stocks A and B b) Compute the standard deviation for stocks A and B. Which stock is riskier?c) Compute the expected return of a portfolio that comprises of 70% stock A and 30% stock B d) Compute the standard deviation of returns for the market portfolio e) Which, among stocks A, B and the market is riskier? Respond in light of your computationsarrow_forward
- (4) Please answer the following short questions with what you have learned. There is a portfolio of two assets - 30% investment in Stock A and 70% investment in Stock B. The correlation of returns between Stock A and Stock B is 0.50. The covariance between these two stocks is 0.0043, and the standard deviation of the return of Stock B is 26%. Requirements: (a) Please calculate the standard deviation of the return of Stock A. (b) Please calculate the standard deviation of the return of portfolio. (c) If we increase more and more different stocks in the portfolio, will it always decrease the risk (standard deviation) of the return of the portfolio? Please explain your answer in detail.arrow_forwardSuppose a portfolio is given as follows: Investment Name ABC Corn Mill X-Treme Manufacturing b.) 3.6% Ob.) none listed a.) none listed a.) 4.5% a.) 4% b.) 4% b.) 3.4% Weight a.) 5% 0.4 0.6 a.) What is the expected return of the portfolio? b.) What is the standard deviation of the portfolio if the correlation is +0.4? Select the most appropriate responses below for parts a.) and b.). Expected Return 2% 7% Standard Deviation 2% 5%arrow_forwardCalculate the standard deviation of a portfolio with 0.24 invested in Asset A, 0.33 invested in Asset B, and the rest invested in Asset C. Express your answer as a decimal with four digits after the decimal point (e.g., 0.1234, not 12,34%). Std Dev(A) = 0.43, Std Devirg) = 0.67. Std Dev(rc)=0.53 Correlation(A) =-0.24, Correlation(Arc)-0.32, Correlationirere)=0.09 Type your answer.....arrow_forward
- (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.20 0.60 0.20 Probability 0.15 0.35 0.35 0.15 (Click on the icon in order to copy its contents into a spreadsheet.) Common Stock B Return 13% 14% 18% Return - 6% 7% 15% 21% a. Given the information in the table, the expected rate of return for stock A is 14.6 %. (Round to two decimal places.) The standard deviation of stock A is %. (Round to two decimal places.)arrow_forwardConsider the following table which provides a comparison of the returns for a portfolio and its benchmark. Year 0 1 2 3 4 5 Return Alpha Sum Tracking Error Information Ratio Note: the numbers in red are negative b. Calculate the portfolio alpha in percentage terms c. Calculate the tracking error of the portfolio in percentage terms Portfolio Return 16% 9% -35% 22% 84% Required a. Calculate the annualised return of the portfolio and the benchmark in percentage terms d. Calculate the information ratio of the portfolio to 2 decimal places e. Determine to 2 decimal places the amount of Carhart alpha for the portfolio in percentage terms if: o the risk-free rate is 3.25%, o the return of the market is 9.20%, o the exposure to the value factor (when the premium is 3.15%) is 0.65 (ie 65%), o the exposure to the small cap factor (when the premium is 2.05%) is -0.12, and o the exposure to the momentum factor (when the premium is 46%) is 0.1. Benchmark Return 14% 7% -38% 18% 86%arrow_forwardConsidering the attached set of securities and portfolio returns: Find the combination of the weights that minimizes CV of the portfolio. How does the CV of the optimal portfolio compare with the CVs of its constituents?arrow_forward
- Expected return of a portfolio using beta. The beta of four stocks—P, Q, R, and S—are 0.49, 0.81, 1.19, and 1.53, respectively and the beta of portfolio 1 is 1.01, the beta of portfolio 2 is 0.86, and the beta of portfolio 3 is 1.15. What are the expected returns of each of the four individual assets and the three portfolios if the current SML is plotted with an intercept of 4.5% (risk-free rate) and a market premium of 12.0% (slope of the line)? What is the expected return of stock P? (Round to two decimal places.) What is the expected return of stock Q? (Round to two decimal places.) What is the expected return of stock R? (Round to two decimal places.) What is the expected return of stock S? (Round to two decimal places.) What is the expected return of portfolio 1? (Round to two decimal places.) What is the expected return of portfolio 2? (Round to two decimal places.) What is the expected return of portfolio 3?…arrow_forwardUsing the data in the following table, and the fact that the correlation of A and B is 0.29, calculate the volatility (standard deviation) of a portfolio that is 60% invested in share A and 40% invested in share B. Click on the icon located on the top-right corner of the data table below to copy its contents into a spreadsheet. Realised Returns Year Share A Share B 2007 - 14% 14% 2008 2009 9% 3% 31% 7% 2010 - 2% - 1% 2011 2% - 6% 2012 8% 16% The standard deviation of the portfolio is ☐ %. (Round to two decimal places.)arrow_forward1.2. Refer to the following observations for stock A and the market portfolio in the table: Month Rate of return Stock A Market portfolio 1 0.30 0,12 0.24 0,08 3 -0,04 -0,10 -0,02 0,08 0,07 4 0,10 5 0,06 6 0,10 a) Calculate the main statistic measures to explain the relationship between stock A and the market portfolio: i) The sample covariance between rate of return for the stock A and the market. ii) The sample Beta factor of stock A. iii) The sample correlation coefficient between the rates of return of the stock A and the market. iv) The sample coefficient of determination associated with the stock A and the mar- ket. b) Draw in the characteristic line of the stock A and give the interpretation - what does it show for the investor? c) Calculate the sample residual variance associated with stock's A characteristic line and explain how the investor would interpret the number of this statistic. d) Do you recommend this stock for the investor with the lower tolerance of risk?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Investing For Beginners (Stock Market); Author: Daniel Pronk;https://www.youtube.com/watch?v=6Jkdpgc407M;License: Standard Youtube License