You have a portfolio with a standard deviation of 20% and an expected return of 15%. You are considering adding one of the two stocks in the following table: If after adding the stock you will have 30% of your money in the new stock and 70% of your money in your existing portfolio, which one should you add? Standard deviation of the portfolio with stock A is 16.46%. (Round to two decimal places.) Standard deviation of the portfolio with stock B is 18.19%. (Round to two decimal places.) Which stock should you add and why? (Select the best choice below.) A. Add A because the portfolio is less risky when A is added. B. Add B because the portfolio is less risky when B is added. C. Add either one because both portfolios are equally risky. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Stock A Stock B Expected Return 14% 14% Standard Deviation 21% 18% Correlation with Your Portfolio's Returns 0.2 0.7 - X

You have a portfolio with a standard deviation of 20% and an expected return of 15%. You are considering adding one of the two stocks in the following table: If after adding the stock you will have 30% of your money in the new stock and 70% of your money in your existing portfolio, which one should you add? Standard deviation of the portfolio with stock A is 16.46%. (Round to two decimal places.) Standard deviation of the portfolio with stock B is 18.19%. (Round to two decimal places.) Which stock should you add and why? (Select the best choice below.) A. Add A because the portfolio is less risky when A is added. B. Add B because the portfolio is less risky when B is added. C. Add either one because both portfolios are equally risky. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Stock A Stock B Expected Return 14% 14% Standard Deviation 21% 18% Correlation with Your Portfolio's Returns 0.2 0.7 - X

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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You are creating a portfolio of two stocks. The first one has a standard deviation of 20% and the second one has a standard deviation of 50%. The correlation coefficient between the returns of the two is 0.2. You will invest 70% of the portfolio in the first stock and the rest in the second stock. What will be the standard deviation of this portfolio's returns? Answer in percent, rounded to one decimal place (e.g., 4.32%=4.3).
You have a portfolio with a standard deviation of 24% and an expected return of 19%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 30% of your money in the new stock and 70% of your money in your existing portfolio, which one should you add? Standard deviation of portfolio with stock A is ? Expected Return Standard Deviation Correlation with Your Portfolio's Returns Stock A 12 % 22 % 0.2 Stock B 12 % 17 % 0.7
You are analyzing a stock that has a beta of 1.19. The risk-free rate is 4.4% and you estimate the market risk premium to be 6.6%. If you expect the stock to have a return of 9.8% over the next year, should you buy it? Why or why not? The expected return according to the CAPM is%. (Round to two decimal places.) Should you buy the stock? (Select the best choice below.) O A. Yes, because the expected return based on the beta is equal to or less than the return on the stock. O B. No, because the expected return based on the beta is greater than the return on the stock.
c) Stock 1 has a standard deviation of return of 1%. Stock 2 has a standard deviation of return of 8%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio? Please provide the details of your calculations and discuss your results. You decide now to combine your portfolio (discussed in question c) with another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero. d) What is the standard deviation of this new portfolio? Please provide the details of your calculations and discuss your results.
c) Stock 1 has a standard deviation of return of 1%. Stock 2 has a standard deviation of return of 8%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio? Please provide the details of your calculations and discuss your results. You decide now to combine your portfolio (discussed in question c) with another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero. d) What is the standard deviation of this new portfolio? Please provide the details of your calculations and discuss your results. e) Did we achieve diversification by combining uncorrelated portfolios with identical levels of risk? Explain.
You have a portfolio with a standard deviation of 29% and an expected return of 19%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 20% of your money in the new stock and 80% of your money in your existing portfolio, which one should you add? Expected Return Standard Correlation with Deviation Your Portfolio's Returns Stock A 16% 23% 0.4 Stock B 16% 16% 0.5 Standard deviation of the portfolio with stock A is %. (Round to two decimal places.) Standard deviation of the portfolio with stock B is %. (Round to two decimal places.) Which stock should you add and why? (Select the best choice below.) A. Add B because the portfolio is less risky when B is added. B. Add A since the portfolio is less risky when A is added. C. Add either one because both portfolios are equally risky.
Consider an investment portfolio that consists of three different stocks, with the amount invested in each asset shownbelow. Assume the risk-free rate is 2.5% and the market risk premium is 6%. Use this information to answer thefollowing questions.Stock Weights BetasChesapeake Energy 25% 0.8Sodastream 50% 1.3Pentair 25% 1.0a) Compute the expected return for each stock using the CAPM and assuming that the stocks are all fairly priced.b) Compute the portfolio beta and the expected return on the portfolio.c) Now assume that the portfolio only includes 50% invested in Pentair and 50% invested in Sodastream (i.e., a twoassetportfolio). The yearly-return standard deviation of Pentair is 48% and the yearly-return standard deviation ofSodastream is 60%. The correlation coefficent between Pentair’s returns and Sodastream’s returns is 0.3 What is theexpected yearly-return standard deviation for this portfolio?
You have a portfolio with a standard deviation of 23% and an expected return of 15%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 25% of your money in the new stock and 75% of your money in your existing portfolio, which one should you add? Stock A Stock B Expected Return 15% 15% Standard Deviation 24% 20% Standard deviation of the portfolio with stock A is Correlation with Your Portfolio's Returns 0.2 0.6 %. (Round to two decimal places.) %. (Round to two decimal places.) Standard deviation of the portfolio with stock B is Which stock should you add and why? (Select the best choice below.) Text A. Add A because the portfolio is less risky when A is added. B. Add B because the portfolio is less risky when B is added. OC. Add either one because both portfolios are equally risky. Next
You invest 80% of your portfolio in a risky portfolio that has an expected rate of return of 15% and a standard deviation of 21%, and the rest in T-bill with a 2% rate. What is the expected return of your portfolio? Enter your answer as a decimal number, rounded to three decimal places.
Standard deviation of the portfolio with stock A is 22.86 %. (Round to two decimal places.) Standard deviation of the portfolio with stock B is 23.47 %. (Round to two decimal places.) Which stock should you add and why? (Select the best choice below.) A. Add A because the portfolio is less risky when A is added. B. Add B because the portfolio is less risky when B is added. OC. Add either one because both portfolios are equally risky.
You have a portfolio with a standard deviation of 25% and an expected return of 17%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 25% of your money in the new stock and 75% of your money in your existing portfolio, which one should you add? Stock A Stock B Expected Return 16% 16% Standard Deviation 24% 19% Correlation with Your Portfolio's Returns 0.4 0.7 Standard deviation of the portfolio with stock A is%. (Round to two decimal places.)
You create a portfolio that invests 60% in stock A with E(rA) = 15%, σA = 10% and 40% in stock B with E(rB) = 10%, σB = 4%. 1. Estimate the expected return of the portfolio. 2. Estimate the standard deviation of the portfolio if the two stocks are uncorrelated. 3. Estimate the standard deviation of the portfolio if the two stocks have correlation 0.5. 4. Estimate the standard deviation of the portfolio if the two stocks are perfectly positively correlated.

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