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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Textbook Question
Chapter 7, Problem 17PS
Portfolio risk Table 7.9 shows standard deviations and correlation coefficients for eight stocks from different countries. Calculate the variance of a portfolio with equal investments in each stock.
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Students have asked these similar questions
Calculate the correlation coefficient for the portfolio using the following information:
Variance of Stock X 0.08 Variance of Stock Y 0.06
Covariance is 0.05
a. 0.1042
b. 0.7217
c. 0.00024
d. 0.0693
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?…
Consider two stocks, Stock D, with an expected return of 13 percent and a standard deviation of 28 percent, and Stock I, an international company, with an expected return of 16 percent and a standard deviation of 38 percent. The correlation between the two stocks is -0.1. What is the weight of stock D in the minimum variance portfolio?
Chapter 7 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Portfolio risk True or false? a. Investors prefer...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Prob. 9PSCh. 7 - Prob. 10PS
Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Prob. 12PSCh. 7 - Prob. 13PSCh. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.9 shows standard deviations...Ch. 7 - Portfolio risk Your eccentric Aunt Claudia has...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio risk You can form a portfolio of two...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...Ch. 7 - Beta Calculate the beta of each of the stocks in...
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- Expected return of a portfolio using beta. The beta of four stocks-P, Q, R, and S-are 0.59, 0.89, 1.05, and 1.31, respectively and the beta of portfolio 1 is 0.96, the beta of portfolio 2 is 0.87, and the beta of portfolio 3 is 1.05. 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.)arrow_forwardConsider two stocks, Stock D with an expected return of 21 percent and a standard deviation of 36 percent and Stock I, an international company, with an expected return of 9 percent and a standard deviation of 24 percent. The correlation between the two stocks is -22. What are the expected return and standard deviation of the minimum variance portfolio? (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Expected return Standard deviation % %arrow_forwardQUESTION 1 Under which of the following scenarios, the minimum variance portfolio that contains two stocks has the smallest standard deviation? OA. The correlation between the two stock returns is -1 OB. The correlation between the two stock returns is -0.2 OC. The correlation between the two stock returns is 0.2 OD. The correlation between the two stock returns is 0.5arrow_forward
- 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 recommend if investment in individual stock is to be made? Justify answer using numerical calculations. Stock A Stock B Expected return 24% 35% Standard deviation 12% 18% Coefficient of correlation 0.65 0.65arrow_forwardFrom 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 0.65arrow_forwardconsider a portfolio composed of five securities. All the securities have a beta of 1.0 and unique or specific risk (Standard Deviation) of 25 percent. The portfolio distributes weight equally among its component securities. If the Statement Deviation of the market index is 18 percent calculate the total risk of the portfolio.arrow_forward
- A portfolio is comprised of equal weights of two stocks labeled Stock X and Stock Y. The covariance between Stock X and Stock Y is 0.10. The standard deviation of Stock X is 0.50, and the standard deviation of Stock Y is 0.50. Which of the following comes closest to the correlation coefficient between Stock X and Stock Y? Select one: a. 0.60 b. 0.50 c. 1.00 d. 0.00 e. 0.40arrow_forwardAn investment portfolio has equal proportions invested in five stocks.The expected returns and standard deviations (both in percent per year) are (8, 3),(5, 2), (12, 8), (7, 9), (14, 15). What are average return and standard deviation forthis portfolio?arrow_forwardThe market and Stock J have the following probability distributions: a. Calculate the expected rates of return for the market and Stock J. b. Calculate the standard deviations for the market and Stock J.arrow_forward
- A portfolio is comprised of equal weights of two stocks labeled Stock X and Stock Y. The covariance between Stock X and Stock Y is 0.10. The standard deviation of Stock X is 0.50, and the standard deviation of Stock Y is 0.50. Which of the following comes closest to the variance of the portfolio? Select one: a. 0.60 b. 1.00 c. 0.42 d. 0.18 e. 0.55arrow_forwardCalculate the expected return, variance, and standard deviation for a portfolio of four equally weighted stocks with returns of 26.4%, -9.2%, 2.9%, and 22.0%arrow_forwardConsider the following probability distribution for stocks A and B: Table 4 Probability Distribution for Stocks A and B State Probability Return on Stock A Return on Stock B 1 0.1 10% 8% 2 0.2 13% 7% 3 0.2 12% 6% 4 0.3 14% 9% 5 0.2 15% 8% The variances of Stocks A and B are _____ and _____, respectively. Group of answer choices .015%; .019% .022%; .012% .032%; .02% .015%; .011% .014%; .021%arrow_forward
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