A two-share portfolio held by an institutional investor has the following information: Years (t) ABC return (%) XYZ return (%) -4 6.6 24.5 -3 5.6 -5.9 -2 -9.0 19.9 -1 12.6 -7.8 0 14.0 14.8 Use the above information to answer the following questions: 4.a. ) Based on expected return alone, which of the two stocks is preferable? 4.b. Based on standard deviation alone which of the two stocks is preferable? 4.c. Compute the return of the portfolio
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- A two-share portfolio held by an institutional investor has the following information:
Years (t) |
ABC return (%) |
XYZ return (%) |
-4 |
6.6 |
24.5 |
-3 |
5.6 |
-5.9 |
-2 |
-9.0 |
19.9 |
-1 |
12.6 |
-7.8 |
0 |
14.0 |
14.8 |
Use the above information to answer the following questions:
4.a. ) Based on expected return alone, which of the two stocks is preferable?
4.b. Based on standard deviation alone which of the two stocks is preferable?
4.c. Compute the return of the portfolio
4.d. Compute the standard deviation of the portfolio if the weight of Stock XYZ is 20%
4.e. In your view, is the combination of Stock ABC and Stock XYZ good for diversification?
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- a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .45 correlation with the market portfolio and a standard deviation of 55 percent? c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of…A two-share portfolio held by an institutional investor has the following information: Years (t) ABC return (%) XYZ return (%) -4 6.6 24.5 -3 5.6 -5.9 -2 -9.0 19.9 -1 12.6 -7.8 0 14.0 14.8 Use the above information to answer the following questions: a. Compute the standard deviation of the portfolio if the weight of Stock XYZ is 20% b. In your view, is the combination of Stock ABC and Stock XYZ good for diversification?a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio returm and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a 45 corelation with the market portfolio and a standard deviation of 55 percent? C. Suppose the risk-free rate is 4.2 percent and the market portfolıo has an expected return of 10.9 mercent Tibemadkat normfeliobasiabiamance…
- Utilizing the information below on 2 recently purchased stocks, compute the risk of the portfolio for the different levels of correlation between the 2 securities: Stock A B Expected Return 0.14 0.17 Std Dev of returns 0.11 0.11 Proportion invested 0.35 0.65 Correlation coefficient 1 0.4 0.1 0 -0.4 -1Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% i. Calculate expected return on each stock? On the basis of this measure, which stockyou will choose?ii. Calculate standard deviation of the returns on each stock? On the basis of thismeasure, which stock you will choose?iii. Calculate coefficient of variance of the returns on each stock? On the basis of thismeasure, which stock you will choose?
- QG. The following information is available about the stocks of two companies A and B: Stock A Stock B Expected Return (%) Probability -5 12 15 20 0.05 0.55 0.35 0.05 Expected Return (%) Probability 5 15 18 20 0.05 0.65 0.20 0.10 Stock Standard Deviation of Returns (%) A B 25 35 The coefficient of correlation between the returns on A and B is 0.05. A portfolio is constructed by allocating the funds between A and B in the ratio of 2:3. Calculate the expected return on the portfolio. b. Calculate the portfolio risk.A portfolio consists of two stocks: Stock Expected Return Standard Deviation Weight Stock 1 10% 15% 0.30 Stock 2 13% 20% ??? The correlation between the two stocks’ return is 0.50 (a) Calculate the expected return and standard deviation of the portfolio. Expected Return: Standard Deviation: b) (i) Briefly explain, in general, when there would be “benefits of diversification” (for any portfolio of two securities). (ii) Describe whether the above portfolio would exhibit “benefits of diversification” (and why). [No calculations are required.] (c) Show your calculations re: whether the above portfolio exhibits “benefits of diversification”and indicate whether it does/doesn’t (and why).Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% Calculate covariance and coefficient of correlation between the returns of thestocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfoliocomprising of $45,000 invested in stock A and remaining amount in stock B.Calculate risk and return of your portfolio.
- The following questions are based on the given information from table of probabilitydistributions of returns on investment individual shares and portfolio below:Table 3: Probability distributions of returns on investment for individual shares and portfolio. State ofEconomy Probabilityof theStates Return onShare A(rA) Return onShare B(rB) Return on Portfolio AB(rAB)1 0.20 15% -5% 5%2 0.20 -5% 15% 5%3 0.20 5% 25% 15%4 0.20 35% 5% 20%5 0.20 25% 35% 30% Given: By using the above information, demonstrate the rate of risk (variance and standarddeviation) for each of:(i) Share A (ii) Share B (iii) Portfolio A and BConsider the following information about two stocks (D and E) and two common risk factors (factor 1 and factor 2) Stock Risk factor 1 Risk factor 2 Expected return (%) D 1.2 3.4 13.1 2.6 2.6 15.4 a. Assuming that the risk free rate is 5%, determine the risk premium for factors 1 and 2 that are consistent with the expected returns for the two stocks. You expect that in one year the prices of Stock D and E will be $55 and $36 respectively and pay no dividends. What should be the price of each stock today to be consistent with the expected return levels. b. C. Determine how to you identified if Stock D and E are overvalued, fairly valued and undervalued? d. Suppose the risk premium for factor 1 as computed in (a) increases by 0.25 percent, what will be the new expected return for D and E? e. Suppose the risk premium for factor 1 as computed in (a) decreases by 0.25%, what will be the new expected return for D and E? f. Devise how would you develop a Jensen Index using Arbitrage Pricing…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 0.65