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 21PS
Portfolio risk Here are some historical data on the risk characteristics of Bank of America and Starbucks:
Assume the standard deviation of the return on the market was 23.0%.
- a. The correlation coefficient of Bank of America’s return versus Starbucks is .30. What is the standard deviation of a portfolio invested half in each share?
- b. What is the standard deviation of a portfolio invested one-third in Bank of America, one-third in Starbucks, and one-third in risk-free Treasury bills?
- c. What is the standard deviation if the portfolio is split evenly between Bank of America and Starbucks and is financed at 50% margin, that is, the investor puts up only 50% of the total amount and borrows the balance from the broker?
- d. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.57 like Bank of America? How about 100 stocks like Starbucks? (Hint: Part (d) should not require anything but the simplest arithmetic to answer.)
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Here are some historical data on the risk characteristics of Ford and Harley Davidson.
Ford
Harley Davidson
β (beta)
1.26
0.69
Yearly standard deviation of return (%)
30.9
16.9
Assume the standard deviation of the return on the market was 12.0%.
a. The correlation coefficient of Ford’s return versus Harley Davidson is 0.27. What is the standard deviation of a portfolio invested half in each share?
b. What is the standard deviation of a portfolio invested one-third in Ford, one-third in Harley Davidson, and one-third in risk-free Treasury bills?
c. What is the standard deviation if the portfolio is split evenly between Ford and Harley Davidson and is financed at 50% margin, that is, the investor puts up only 50% of the total amount and borrows the balance from the broker?
d-1. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.26 like Ford?
d-2. What is the approximate standard deviation of a portfolio composed of…
solve using Excel and show formulas.
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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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