Linda is analyzing a two-stock portfolio that consists of a utility stock and a commodity stock. She knows that the return on the utilitystock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 percent. However,she does not know the exact covariance of the returns of the two stocks. Linda would like to plot the variance of the portfolio for eachof three cases-covariance of 0.015, 0, and -0.015-in order to understand what the variance of the portfolio would be for a range ofcovariances. Do the calculation for all three cases (0.015, 0, and -0.015), assuming an equal proportion of each stock in the portfolio.Problem 7.21(a1)Case 1,01,2 = 0.015: (Round answer to 4 decimal places, e.g. 0.0768.)VarianceeTextbook and Media23E

An equal proportion is invested in each stock, therefore weight will be = 0.50Weight utility stock =…

Answered: Linda is analyzing a two-stock…

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

See similar textbooks

Similar questions

Debra is analyzing a two stock portfolio that consists of a utility stock and a commondity stock. she knows that the return on the utility stock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 percent. however, she does not know the exact vocariance in the returns of the two stocks. debra would like to plot the variance of the portfolio for each of three cases - covariance of 0.100, 0, and -0.100 in order to understand what the variance of the portfolio would be for a range of covariances. do the calculation for all three cases (0.100,0, and -0.100) assuming an equal proportion of each stock in the portfolio. variance:______ coefficient:________ standard deviation:______
You are going to invest in Asset J and Asset S. Asset J has an expected return of 14.2 percent and a standard deviation of 55.2 percent. Asset S has an expected return of 11.2 percent and a standard deviation of 20.2 percent. The correlation between the two assets is .50. What are the standard deviation and expected return of the minimum variance portfolio? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) Standard deviation Expected return 11.01 % %
Stock A has an expected return of 9%, while the market portfolio has an expected return of 6.36%. Stock A has variance 2.56 %, and the risk-free rate is 1%. You are a financial advisor and try to assess quantitatively the risk aversion of one of your clients, giving her a questionnaire about risk-return preferences. From her answers, you conclude that her risk-aversion coefficient is 4. a. Derive the condition under which you could claim that the CAPM holds. b. Derive the condition under which your client would be indifferent between investing her wealth either in the riskless asset or in the market. c) Your client also asks you to show her an alternative portfolio created by mixing the riskless asset with stock A. In this case, which weights would you suggest?
Suppose we form a portfolio invested in Mercedes and BMW stocks. The two stocks are equally weighted in the portfolio. The table below displays each stock’s mean return, variance, and standard deviation, as well as their covariance. Estimate the mean and variance of this portfolio, as well as its standard deviation. Show in detail your Asset returns Mercedes BMW Mean return 1.78% -0.48% Variance 0.0456 0.0276 Standard deviation 21.35% 16.61% Covariance 0.0020
(a) Calculate the expected rate of return, variance and standard deviation of Stock X & Stock Y. (b) Assume that the covariance between Stock X and Stock Y is -0.005. Calculate the expected rate of return, variance and standard deviation of Jenny’s portfolio. {Hint: you can express your answers for the variance and standard deviation in decimals or percentage form:• For decimals, the covariance in your equation should be -0.005• For percentage, the covariance in your equation should be -50%2(= -50/10000)] (c) Explain why, in general, the portfolio risk is lower than the weighted average of individual stocks’ risk. (d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates ofreturn of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.
You are going to invest in Asset J and Asset S. Asset J has an expected return of 13.6 percent and a standard deviation of 54.6 percent. Asset S has an expected return of 10.6 percent and a standard deviation of 19.6 percent. The correlation between the two assets is 0.50. What are the standard deviation and expected return of the minimum variance portfolio? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Expected return Standard deviation % %
Suppose that Jerry Tan has surplus funds to invest in both stocks, Alpha and Beta. He has decided to form a portfolio with investment in both stocks. The correlation coefficient between the expected return of both stocks is 0.8 and the weightage of investment is 40% for Stock Alpha and 60% for Stock Beta.Required:(i) Compute the expected return of the portfolio. (ii) Compute the variance of the portfolio. (iii) Compute the standard deviation of the portfolio.
In this question, you will be asked to calculate the variance/risk of a portfolio consisting of two assets. Consider a portfolio that only consists of asset E and asset B. E has weight of 60%, and B has weight of 40%. The variance of E is about 13%, and the variance of B is about 4%. The covariance between E and B is about 0.2. What is the variance of this portfolio? 0.1492 O 0.1012 0.19 0.094
(b) Assume that the covariance between Stock X and Stock Y is -0.005. Calculate the expected rate of return, variance and standard deviation of Jenny’s portfolio. {Hint: you can express your answers for the variance and standard deviation in decimals or percentage form:• For decimals, the covariance in your equation should be -0.005• For percentage, the covariance in your equation should be -50%2(= -50/10000)]
A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________. ) .583 ) .225 ) .327 ) .128
Emmy is analysing a two-share portfolio that consists of a utility share and a commodity share. She knows that the return on the utility has a standard deviation of 35 percent, and the return on the commodity has a standard deviation of 41 percent. Calculate the variance of the portfolio if the covariance (σ12) is 0.16, assuming an equal proportion of each share in Emmy’s portfolio Round your answer to 2 decimal places. E.g. if the final value is 5.8312%, please type 5.83 in the answer box (do not type the percentage sign). Variance, Var(R2 asset port) =
You are going to invest in Asset J and Asset S. Asset J has an expected return of 10.8 percent and a standard deviation of 51.8 percent. Asset S has an expected return of 7.8 percent and a standard deviation of 16.8 percent. The correlation between the two assets is 0.50. What are the standard deviation and expected return of the minimum variance portfolio? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decin places. Expected return Standard deviation % %

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS