CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196222
Author: Bodie
Publisher: MCG
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Textbook Question
Chapter 6, Problem 5PS
The standard deviation of the market-index portfolio is 20%. Stock A has a beta of 1.5 and a residual standard deviation of 30%. (LO 6-5)
a. What would make for a larger increase in the stock’s variance: an increase of 0.15 in its beta or an increase of 3% (from 30% to 33%) in its residual standard deviation?
b. An investor who currently holds the market-index portfolio decides to reduce the portfolio allocation to the market mdcx to 90% and to invest 10% in stock A. Which of the changes in (a) will have a greater impact on the portfolios standard deviation?
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An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 25%
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What is the standard deviation of return on the minimum variance portfolio? Do not enter % in the answer box. For
example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
The expected return and standard deviation of Stock A are 12% and 24%, respectively. The expected return and standard deviation of Stock B are 5% and 19%, respectively. The correlation between the two stocks is 0.4. The risk-free rate in the economy is 1%.
A. What is the Sharpe ratio for Stock A and Stock B?
Show your calculation steps briefly and clearly.
B. Calculate the optimal risky portfolio P*.
You do not need to show your calculation steps for this subquestion.
C. Now suppose that the correlation between the two stocks is -0.2 (instead of 0.4). Re-calculate the optimal risky portfolio P* and compare it to your answer in Part B. What do you observe?
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D. Using the results above, briefly explain why investors might still consider investing in stocks with a (relatively) low Sharpe ratio as a part of their portfolio.
16.
There are two stocks with the following return and risk values. The correlation between A and B is 0.2.
al
Expected Standard
Return(%) Deviation(%)
Stock
A
5.5
10
B
7.5
17
What is the standard deviation of the minimum variance portfolio(MVP) that is
a)
formed by combining assets A and B? (That is, what are the weights of stock A and stock B in
MVP?)
b)
What is the expected return of the portfolio P that is formed by investing 50% on the
MVP and 50% on a stock that has an expected return of 10%?
c) Assume that the only assets available to investors are the risk free asset and the
portfolio P. The risk free rate is 2%. Assume also that there is $100 to be invested. What is the
expected return of a NEW portfolio that is formed by combining risk free rate with a weight of -0.5
and portfolio P with a weight of 1.5? What does a negative weight mean? Explain with one
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Chapter 6 Solutions
CONNECT WITH LEARNSMART FOR BODIE: ESSE
Ch. 6.5 - Prob. 1EQCh. 6.5 - In light of each firm’s exposure to the financial...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. 8PS
Ch. 6 - Prob. 9PSCh. 6 - Prob. 10PSCh. 6 - Prob. 11PSCh. 6 - Prob. 12PSCh. 6 - Stocks offer an expected rate of return of 10%...Ch. 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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