Videos
Abigail Grace has a $900,000 fully diversified portfolio. She subsequently inherits ABC Company common stock worth $100,000. Her financial adviser provided her with the following estimates: (LO 6-5)
Risk and Return Characteristics
Expected Monthly Returns
Standard Deviation of Monthly Returns
Original Portfolio 0.67% 237%
ABC Company 1.25 2.95
The correlation coefficient of ABC stock returns with the original portfolio returns is .40.
a. The inheritance changes Grace’s overall portfolio and she is deciding whether to keep the ABC stock. Assuming Grace keeps The ABC stock, calculate the:
I. Expected return of her new portfolio which includes the ABC stock.
ii. Covariance of ABC stock returns with the original portfolio returns.
iii. Standard deviation of her new portfolio which includes the ABC stock.
b. If Grace sells the ABC stock, she will invest the proceeds in risk-free government securities yielding 0.42% monthly. Assuming Grace sells the ABC stock and replaces it with the government Securities, calculate the:
i. Expected return of her new portfolio which includes the government securities.
ii. Covariance of the government security returns with the original portfolio returns.
iii. Standard deviation of her new portfolio which includes the government securities.
c. Determine whether the beta of her new portfolio, which includes the govern mdi securities, will he higher or lower than the beta of her original portfolio.
d. Based on conversations with her husband, Grace is considering selling the $100,000 of ABC stock and acquiring $100,000 of XYZ Company common stock instead. XYZ stock has the same expected return and standard deviation as ABC stock. Her husband comments. “It doesn’t matter whether you keep all of the- ABC stock or replace it with $100.000 of XYZ stock.” State whether her husband’s comment is correct or incorrect. Justify your response.
e. In a recent discussion with her financial adviser, Grace commented, “if I just don’t lose money in my portfolio, I will be satisfied.” She went on to say. “1 am more afraid of losing money than I am concerned about achieving high returns.” Describe one weakness of using standard deviation of returns as a risk measure for Grace.
Want to see the full answer?
Check out a sample textbook solution
Chapter 6 Solutions
Essentials Of Investments
- 3. If $1000 is invested at 5% annual interest, how much will it be after 2 years ()?A) $100B) $1100C) $1050D) $110 need help!!arrow_forwardNo ai If a loan of $1,000 has 10% simple interest for 2 years, what is the interest?A) $100B) $200C) $150D) $250arrow_forwardIf a loan of $1,000 has 10% simple interest for 2 years, what is the interest?A) $100B) $200C) $150D) $250arrow_forward
- Don't use chatgpt !! A person invests $5,000 at 8% compound interest annually. What is the amount after 1 year?A) $5,800B) $5,400C) $5,600D) $5,000arrow_forwardDo not use chatgpt!! What does ROI stand for in finance? A) Return on Investment B) Rate of Income C) Return on Interest D) Revenue on Investmentarrow_forwardA person invests $5,000 at 8% compound interest annually. What is the amount after 1 year?A) $5,800B) $5,400C) $5,600D) $5,000arrow_forward
- No AI What does ROI stand for in finance? A) Return on Investment B) Rate of Income C) Return on Interest D) Revenue on Investmentarrow_forwardWhat does ROI stand for in finance?A) Return on InvestmentB) Rate of IncomeC) Return on InterestD) Revenue on Investmentarrow_forwardA bank offers 6% annual interest. What is the interest on $500 for 1 year?A) $30B) $25C) $35D) $20arrow_forward
- No Ai A bank offers 2% interest per month. Annual rate is:A) 12%B) 18%C) 24%D) 20%arrow_forwardI need help! A bank offers 2% interest per month. Annual rate is:A) 12%B) 18%C) 24%D) 20%arrow_forwardDon't use chatgpt!!!! If you invest $1,500 at 6% for 1 year, interest is:A) $60B) $90C) $75D) $80arrow_forward
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT