Question

In: Finance

An investor decides to diversify her favorite stock holding(expected return 25%, standard deviation 50%) with a...

An investor decides to diversify her favorite stock holding(expected return 25%, standard deviation 50%) with a nearly riskless governmental bond( risk-free rate 4%) What risk( standard deviation, in %) does the investor have to accept in order to receive an expected return of 20% ?

Solutions

Expert Solution

  

_______________________________

_______________________________

Let the weight of Risky Asset is X

weight of Risk free Asset will be 1-X

Expected return = Return of risky Asets * Weight of Risky assets + Return of risk free Asets * Weight of Risk free assets

20% = 25% * X + 4% * (1-X)

20% = 25% * X + 4% - 4%*X

20% = 21% * X + 4%

X = 20% - 4% / 21%

X = 76.19% OR 0.7619

Standard Deviation of the portfolio = Standard Deviation of Risky assets * Weight of Risky Assets

= 50% * 0.7619

= 65.63%

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The investor decides to diversify by investing $3,000 in Gryphon stock and $5,000 in Royal stock,...
The investor decides to diversify by investing $3,000 in Gryphon stock and $5,000 in Royal stock, which Grypon stock has an expected return of 9.4% and a standard deviation of 5.24%, and which Royal stock has an expected return of 10% and a standard deviation of 13.5%. The correlation coefficient for the two stocks' returns is 0.7. Calculate the expected return and standard deviation of the portfolio. And I calculated that the expected return of the portfolio is 9.78%, and...
Stock X has an expected return of 11% and the standard deviation of the expected return...
Stock X has an expected return of 11% and the standard deviation of the expected return is 12%. Stock Z has an expected return of 9% and the standard deviation of the expected return is 18%. The correlation between the returns of the two stocks is +0.2. These are the only two stocks in a hypothetical world. A.What is the expected return and the standard deviation of a portfolio consisting of 90% Stock X and 10% Stock Z? Will any...
What are the expected return and standard deviation of stock A and stock B?
Consider the following information:            State    Probability      A           B                    Boom 0.6                    20%     -5%                    Bust     0.4                    -10% 10%What are the expected return and standard deviation of stock A and stock B?If you invest 50% of your money in stock A and 50% of your money in stock B, what are the expected return and standard deviation for the portfolio as a whole (considering both states of the economy)?Use the results...
You have a portfolio with a standard deviation of 25 % and an expected return of...
You have a portfolio with a standard deviation of 25 % 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 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 Deviation Correlation with Your​ Portfolio's Returns Stock A 15​% 23​% 0.4 Stock B 15​%...
The expected return on stock W is 10% and its standard deviation is 15%. Expected return...
The expected return on stock W is 10% and its standard deviation is 15%. Expected return on stock V is 16% and its standard deviation is 24%. The correlation between returns of W and V is 20%. calculate expected return and standard deviation of a portfolio that invests 40% in W and 60% in V. determine the minimum variance combination of W and V and determine its expected return and standard deviation. If the risk-free rate is 4%, determine the...
What are the expected return and the standard deviation for the CoR Stock?    CoR Stock...
What are the expected return and the standard deviation for the CoR Stock?    CoR Stock Scenario Probability of Scenario Rate of Return Worst Case 0.10 −11%   Poor Case 0.20 −4%   Most Likely 0.40 −2%   Good Case 0.20 8%   Best Case 0.10 14%  
The expected return and standard deviation of a portfolio that is 50 percent invested in 3...
The expected return and standard deviation of a portfolio that is 50 percent invested in 3 Doors, Inc.,and 50 percent invested in Down Co. are the following: 3 Doors, Inc. Down Co. Expected return, E(R) 14 % 10 % Standard deviation, σ 42 31 What is the standard deviation if the correlation is +1? 0? −1?
The expected return and standard deviation of a portfolio that is 50 percent invested in 3...
The expected return and standard deviation of a portfolio that is 50 percent invested in 3 Doors, Inc., and 50 percent invested in Down Co. are the following: 3 Doors, Inc. Down Co. Expected return, E(R) 14 % 11 % Standard deviation, σ 47 36 What is the standard deviation if the correlation is +1? 0? −1? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)...
You have a portfolio with a standard deviation of 25% and an expected return of 17%....
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 30% of your money in the new stock and 70% of your money in your existing​ portfolio, which one should you​ add? Expected Return Standard Deviation Correlation with Your​ Portfolio's Returns Stock A 14​% 25​% 0.2 Stock B 14​% 18​% 0.6 Standard deviation...
Stock A has an expected return of 16% and a standard deviation of 30%.
Stock A has an expected return of 16% and a standard deviation of 30%. Stock B has an expected return of 14% and a standard deviation of 13%. The risk-free rate is 4.7% and the correlation between Stock A and Stock B is 0.9. Build the optimal risky portfolio of Stock A and Stock B. What is the expected return on this portfolio?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT