Assume that your cousin holds just one stock, Eastman Chemical Bonding (ECB), which he thinks has very little risk. You agree that the stock is relatively safe,but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for Wilder's Creations andBuildings (WCB). Both companies have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by howmuch would your cousin's risk have been reduced if he had held a portfolio consisting of 40% in ECB and the remainder in WCB? (Hint: Use the samplestandard deviation formula.)Average return=Standard deviation =Select the correct answer.a. 3.68%b. 3.72%c. 3.76%d. 3.84%e. 3.80%YearECBWCB201140.00%40.00%2012-10.00%15.00%201335.00%-5.00%2014-5.00%-10.00%201515.00%35.00%15.00%15.00%22.64%22.64%

Compute risk reduction %; Formulas:

Answered: Assume that your cousin holds just one…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 73% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.) Do not round your intermediate calculations. Year 1 2 3 4 5 Average return = Standard deviation = O a. 5.24 p.p. O b. 0.72 p.p. O c. 2.84 p.p. O d. 0.64 p.p. O e. 3.18 p.p. O Icon Key ECB WCB 40.00% 40.00% -10.00% 19.00% 11 35.00% -5.00% -5.00% -10.00% 19.00% 35.00% 15.80% 22.71% 15.80% 22.71%
You determined that the returns from Grain Processing Inc (GPI) are normally distributed with a mean of 10% and standard deviation of 8%. In addition, you are confident that past returns are good indicators of future returns. If you buy shares in GPI. answer in Finance terms, not Satistics. a) What is the probability that your return will be negative? b) What is the probability that your return will be above 16%?
H. As a new analyst, you have obtained the prices for the stocks of both Lulu and Lemon. Both stocks did not paid any dividends during the entire period. (1) (II) (III) Your manager has asked you (i) to compute the rate of return and standard deviation of the two stocks and suggest that because these companies produce similar products, you should continue your analysis by (ii) computing their covariance and correlation. Show all calculations. Year 2019 2020 2021 2022 2023 Closing prices of LuLu Closing prices of Lemon 20.50 30.10 19.92 28.50 22.45 30.10 24.50 40.30 20.50 36.40 Compute the return and standard deviation of a portfolio with 60% investment in Lulu and 40% in Lemon. Would you recommend putting these two stocks together in a portfolio? Explain why or why not.
All parts are under one questione adn therefore can be answered per your policy. 3. Measuring stand-alone risk using realized (historical) data Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock. Consider the case of Falcon Freight Inc. (FF): Five years of realized returns for FF are given in the following table. Remember: 1. While FF was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on its equity are calculated as arithmetic returns. 3. The historical returns for FF for 2014 to 2018 are: 2014 2015 2016 2017 2018 Stock return 8.75% 5.95% 10.50% 14.70% 4.55% A. Given the preceding data, the average realized return on FF’s stock is . B. The preceding data series…
Which of the following statements is CORRECT? Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of −0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period. Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move. You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re-balance your portfolio to include more high-beta stocks. If the market risk premium remains constant, but the risk-free rate…
Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return 0.35 13% 0.25 −7% 0.30 17% 0.25 8% 0.35 21% 0.25 15% 0.25 23% (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. Given the information in the table, the expected rate of return for stock A is enter your response here%. (Round to two decimal places.)
Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return 0.25 13% 0.25 −7% 0.50 14% 0.25 7% 0.25 18% 0.25 16% 0.25 23% (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. Given the information in the table, the expected rate of return for stock A is enter your response here %. (Round to two decimal places.) Part 2 The standard deviation of stock A is enter your response here %. (Round to two decimal places.) Part 3 b. The expected rate of return for stock B is enter your response here %. (Round to two decimal places.) Part 4 The standard deviation for stock B is enter…
You are conducting some statistical analyses on two securities: Stock X and Stock Y. You find that Stock X has a volatility (i.e., a standard deviation) of 5.78%, while Stock Y has a volatility of 7.94%. If the correlation between the returns of the two firms is 0.25, then what is the covariance between the returns of the two firms closest to? O 0.0011 0.0021 O 11.47 O 21.55 0
(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.20 0.60 0.20 Probability 0.15 0.35 0.35 0.15 (Click on the icon in order to copy its contents into a spreadsheet.) Common Stock B Return 13% 14% 18% Return - 6% 7% 15% 21% a. Given the information in the table, the expected rate of return for stock A is 14.6 %. (Round to two decimal places.) The standard deviation of stock A is %. (Round to two decimal places.)
1) Consider two stocks A and B and their returns are assumed to be normally distributed. Over the past 10 years, both stocks have the same (arithmetic) average annual returns, but Stock A has a significantly higher volatility (measured by standard deviation of annual returns) than Stock B. Which of the following is TRUE? A) Stock A has a higher geometric average return than Stock B. B) Stock A has a lower geometric average return than Stock B. C) Stock A and B have the same geometric average return. D) There is no sufficient information to determine which stock has a higher or lower geometric average return. 2) PL Lumber stock is expected to return 22 percent in a booming economy, 15 percent in a normal economy, and lose 2 percent in a recession. The probabilities of an economic boom, normal state, or recession are 15 percent, 80 percent, and 5 percent, respectively. What is the expected rate of return on this stock? 12.80 percent 14.60 percent 15.20 percent 15.60 percent 3) You would…
1.) Given this return data, the average realized return on Happy Dog Soap Inc.’s stock is _______ . 2.) The preceding data series represents a sample of Happy Dog’s historical returns. Based on this conclusion, the standard deviation of Happy Dog’s historical returns is _______ . 3.) If investors expect the average realized return on Happy Dog Soap Inc.’s stock from 2016 to 2020 to continue into the future, its expected coefficient of variation (CV) is expected to equal _______ .
The attached file contains hypothetical data for working this problem. Goodman Corporation’s and Landry Incorporated’s stock prices and dividends, along with the Market Index, are shown in the file. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends. Calculate the standard deviation of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)

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