Connect 1-Semester Access Card for Essentials of Investments
10th Edition
ISBN: 9781259354977
Author: Zvi Bodie, Alan Marcus, Alex Kane
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 6, Problem 3CP
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.
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Students have asked these similar questions
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:
Risk and Return Characteristics
Expected Monthly Returns
Standard Deviation of Monthly Returns
Original Portfolio
0.67%
2.37%
ABC Company
1.25
2.95
The correlation coefficient of ABC stock returns with the original portfolio returns in .40.
If Grace sells the ABC stock, she will invest the proceeds in risk-free government securities yielding .42% monthly. Assuming Grace sells the ABC stock and replaces it with the government securities, calculate the
Expected return of her new portfolio, which includes the government securities.
Covariance of the government security returns with the original portfolio returns.
Standard deviation of her new portfolio, which includes the government securities.
Penny inherited a $200,000 portfolio of investments from her grandparents when she turned 21. The portfolio is comprised of treasury bills
and stock in Ford and Harley Davidson as follows. Based on the current portfolio composition and the expected returns, what is the
expected rate of return for Penny's portfolio?
a. 7.8%
b. 8.7%
c. 7.0%
d. 8.0%
a..
b..
C.
d..
Treasury Bills
Ford
Harley Davidson
Expected Return
4.5%
8.0%
12.0%
$
A A A
$
$
$ Value
80,000.00
60,000.00
60,000.00
Question 6
Answer parts a), b) and c) based on the information below:
Kasandra has purchased 1,000 shares in ABC Ltd for $40 each. Her analysis suggests that the following four states
of the economy with respective probabilities can affect the price of the share next year. She also expects to receive
a dividend of $2 per share next year.
States of economy
Probability
Price
Boom
10%
$50
Good
30%
$48
Normal
40%
$42
Recession
20%
$30
a) For each scenario above, calculate the total holding period return for Kasandra. Calculate the expected
return from this investment considering all scenarios. Round your answer to the nearest 0.01%.
b) Calculate the total risk of this investment. Round your answer to the nearest 0.01%. /
Chapter 6 Solutions
Connect 1-Semester Access Card for Essentials of Investments
Ch. 6 - Prob. 1PSCh. 6 - When adding a risky asset to a portfolio of many...Ch. 6 - A portfolio’s expected return is 12%, its standard...Ch. 6 - An investor ponders various allocations to the...Ch. 6 - The standard deviation of the market-index...Ch. 6 - Suppose that the returns on the stock fund...Ch. 6 - Use the rate-of-return data for the stock and bond...Ch. 6 - Prob. 8PSCh. 6 - Prob. 9PSCh. 6 - Prob. 10PS
Ch. 6 - Prob. 11PSCh. 6 - Prob. 12PSCh. 6 - Prob. 13PSCh. 6 - Suppose that many stocks are traded in the market...Ch. 6 - You can find a spreadsheet containing annual...Ch. 6 - Assume expected returns and standard deviations...Ch. 6 - Prob. 17PSCh. 6 - Prob. 18PSCh. 6 - A project has a 0.7 chance of doubling your...Ch. 6 - Investors expect the market rate of return this...Ch. 6 - The following figure shows plots of monthly rates...Ch. 6 - Prob. 22PSCh. 6 - Prob. 23PSCh. 6 - Prob. 25CCh. 6 - Prob. 1CPCh. 6 - Prob. 2CPCh. 6 - Abigail Grace has a $900,000 fully diversified...Ch. 6 - Prob. 4CPCh. 6 - Prob. 5CPCh. 6 - Prob. 6CPCh. 6 - Prob. 7CPCh. 6 - Prob. 1WMCh. 6 - Following the procedures in the previous question,...Ch. 6 - Prob. 3WMCh. 6 - Prob. 4WM
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