Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 7, Problem 15PS

Portfolio risk

  1. a) How many variance terms and how many different covariance terms do you need to calculate the risk of a 100-share portfolio?
  2. b) Suppose all stocks had a standard deviation of 30% and a correlation with each other of .4. What is the standard deviation of the returns on a portfolio that has equal holdings in 50 stocks?
  3. c) What is the standard deviation of a fully diversified portfolio of such stocks?
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A portfolio management organization analyzes 60 stocks and constructs a mean-variance efficient portfolio using only these 60 securities.a. How many estimates of expected returns, variances, and covariances are needed to optimize this portfolio?b. If one could safely assume that stock market returns closely resemble a single-index structure, how many estimates would be needed?
If a given stock in the portfolio had established 1.23 beta; the related expected return is at 11.7percent, and 3.5percent is the current earning of a risk-free asset;   a. Determine the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of 0.7, what are the portfolio weights? c. If a portfolio of the two assets has an expected return of 9%, what is its beta? d. If a portfolio of the two assets has a beta of 2.46, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Discuss.
From the following information, calculate covariance between stocks A and B and expected return and risk of a portfolio in which A and B are equally weighted.Which stock would be best recommend if investment in individual stock is to be made? Justify the answer using numerical calculations.   Stock A Stock B Expected return 24% 35% Standard deviation 12% 18% Coefficient of correlation 0.65
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