(a) Suppose you create an equally weighted portfolio (holding weights 1/2) of 2 independent stocks (Cov...

(a) Suppose you create an equally weighted portfolio (holding weights 1/2) of 2 independent stocks (Cov (i,j)=0). What is the portfolio variance?

(b) Suppose you create an equally weighted portfolio (holding weights 1/3) of 3 independent stocks (Cov (i,j)=0 for all i and j). What is the portfolio variance?

(c) Suppose you create an equally weighted portfolio (holding weights 1/4) of 4 independent stocks (Cov (i,j)=0 for all i and j). What is the portfolio variance?

(d) Generalize your results.

Expert Solution

d. covariance is a statistical measure of the directional relationship between two asset returns. hence from above, we can generalize that when covariance between two stock is 0 the variance of the portfolio is equal to the weighted average of variance which is proved in the above calculation.

please find the above image for the solution to point 1,2,3.

the solution involves assumptions and the alternative method for calculating the same also exist.

jeff jeffy answered 2 years ago

You have combined two stocks, A and B, into an equally weighted portfolio (Stable) and it...

You have combined two stocks, A and B, into an equally weighted portfolio (Stable) and it has a variance of 35%. The covariance between A and B is 25%. A is a resource stock and has a variance twice that of B. You have formed another portfolio (Growth) that has an expected return of 17% and a variance of 50%. The expected return on the market is 15% and the risk free rate is 7% Covariance (A,Market) = 22% and...

What is the expected return on an equally weighted portfolio of these three stocks?

Consider the following information: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Stock C Boom 0.74 0.23 0.25 0.17 Bust 0.26 0.11 0.15 0.11 Requirement 1: What is the expected return on an equally weighted portfolio of these three stocks? (Do not round your intermediate calculations.) (Click to select)19.24%21.74%31.27%34.04%13.51% Requirement 2: What is the variance of a portfolio invested 10 percent each in A and B and 80 percent in...

Currently you are holding a portfolio of stocks worth RM2,465,000. You wish to hedge your portfolio....

Currently you are holding a portfolio of stocks worth RM2,465,000. You wish to hedge your portfolio. You have the following information: Portfolio Beta = 0.90 Spot Index Value= 1530 points Risk Free Rate = 6% per annum 3 month Stock Index Futures Contract = 1,544.20 Expected Dividend Yield = 0% The multiplier is RM50 (i) Determine the number of SIF contract to fully hedge your portfolio. (ii) Outline the hedge strategy and show the resulting portfolio value assuming the market...

how you calculate the Portfolio (equally weighted of 3 companies) to find their data will be...

how you calculate the Portfolio (equally weighted of 3 companies) to find their data will be in 60 observation monthly( 5 years) Beta Monthly Er Annual Er EAR STDV Monthly/Annual Sharpe Monthly Sharpe Er Sharpe EAR

You want to create a portfolio equally as risky as the market,and you have $1,000,000...

You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table:AssetInvestmentBetaStock A180,0000.85Stock B290,0001.40Stock C1.45Risk free-rate

You want to create a portfolio equally as risky as the market, and you have $800,000...

You want to create a portfolio equally as risky as the market, and you have $800,000 to invest. You've already allocated a portion of your wealth to Stock A and Stock B, and you've decided to also invest money in Stock C and the risk-free asset. Consider the following information: Asset Investment Beta Stock A $200,000 0.80 Stock B $160,000 1.30 Stock C ? 1.50 Risk-free asset ? ? Required: (a) How much should you invest in Stock...

You want to create a portfolio equally as risky as the market, and you have $1,200,000...

You want to create a portfolio equally as risky as the market, and you have $1,200,000 to invest. Consider the following information: AssetInvestmentBeta Stock A$420,0000.70 Stock B$360,0001.25 Stock C 1.55 Risk-free asset Required: (a)What is the investment in Stock C? (Do not round your intermediate calculations.) (Click to select) $279,484 $305,962 $294,194 $213,028 $282,426 (b)What is the investment in risk-free asset? (Do not round your intermediate calculations.) (Click to select) $130,838 $119,516 $125,806 $206,972 $120,774

You want to create a portfolio equally as risky as the market, and you have $1,000,000...

You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Consider the following information: Asset Investment Beta Stock A $200,000 0.85 Stock B $350,000 1.20 Stock C 1.55 Risk-free asset Required: (a) What is the investment in Stock C? (Do not round your intermediate calculations.) (Click to select)$275,097$253,935$264,516$251,290$144,849 (b) What is the investment in risk-free asset? (Do not round your intermediate calculations.) (Click to select)$192,903$178,065$305,151$176,210$185,484

You want to create a portfolio equally as risky as the market, and you have $500,000...

You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Information about the possible investments is given below: Asset Investment Beta Stock A $ 85,000 .80 Stock B $165,000 1.15 Stock C 1.40 Risk-free asset a. How much will you invest in Stock C? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. How much will you invest in...

You want to create a portfolio equally as risky as the market, and you have $1,100,000...

You want to create a portfolio equally as risky as the market, and you have $1,100,000 to invest. Consider the following information: Asset Investment Beta Stock A $275,000 0.60 Stock B $220,000 1.25 Stock C 1.45 Risk-free asset Required: (a) What is the investment in Stock C? (Do not round your intermediate calculations.) (b) What is the investment in risk-free asset? (Do not round your intermediate calculations.)

Question