Question
In: Finance
If we have a portfolio of multiple stocks with given expected returns and variances, do we...
If we have a portfolio of multiple stocks with given expected returns and variances, do we prefer to hold stocks with higher or lower correlations? Explain your answer for full credit.
Solutions
Expert Solution
it is a simply a concept of diversification dont put your all eggs into the same basket to diversify your investment you need to invest in a stock which have lower co-relation among them. suppose due to the problem in certain industry lets say automobile then if we just have stock in that sector then we will have a hige impect of that problem and we have to bear a lots of losses while at other side we also have invested in few different industries than we will have positive return there and our overall portfolio risk will be at lower point, diversification in the portfolio definetly reduces the risk of the investors. what is happening in today's market if we just have hold the stocks of the real estate company or the automobiles companies we have had to bear a huge losses but if we also have purchased some stocks of pharma companies also to have diversification the portfolio so downturn in other industry will covered from the huge gain from the pharma industry due to an impact of the COVID-19.
jeff jeffy answered 2 years agoRelated Solutions
We know the following expected returns for stocks A and B, given different states of the...
We know the following
expected returns for stocks A and B, given different states of the
economy:
State (s)
Probability
E(rA,s)
E(rB,s)
Recession
0.3
-0.01
0.04
Normal
0.5
0.14
0.07
Expansion
0.2
0.22
0.11
Note:
If you can, it is much faster to solve these problems in a
spreadsheet. However, the answer cannot be had simply by
using the built-in AVERAGE() or STDEV() functions. If you are
somewhat familiar with Excel, you might look into the SUMPRODUCT()
function which is...
2. Two stocks A and B have expected returns, and a variance-covariance matrix of returns given...
2. Two stocks A and B have expected returns, and a
variance-covariance matrix of returns given in Table 1.
Table 1 Stock A
Stock B
E(R)
0.14
0.08
Variance-covariance matrix:
Stock A
Stock B
Stock A
0.04
0.012
Stock B
0.012
0.0225
a) What is the correlation coefficient between the returns on
stock A and stock B?
b) What is the expected return and standard deviation of
portfolio S which is invested 80% in stock A and 20% in
stock...
Intro We know the following expected returns for stocks A and B, given different states of...
Intro
We know the following
expected returns for stocks A and B, given different states of the
economy:
State (s)
Probability
E(rA,s)
E(rB,s)
Recession
0.2
-0.03
0.02
Normal
0.5
0.12
0.05
Expansion
0.3
0.2
0.09
The expected return on
the market portfolio is 0.09 and the risk-free rate is 0.02.
Attempt 3/10 for 8 pts.
Part 1
What is the standard
deviation of returns for stock A?
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(8%)
(21%)
0.2
6
0
0.4
10
24
0.2
24
30
0.1
36
49
Calculate the expected rate of return, rB, for Stock
B (rA = 12.80%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 18.87%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.2
(14%)
(35%)
0.2
4
0
0.3
12
20
0.2
18
29
0.1
30
42
Calculate the expected rate of return, rB, for Stock
B (rA = 8.20%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 25.07%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.2
(11%)
(27%)
0.2
3
0
0.3
11
21
0.2
22
27
0.1
40
41
A.Calculate the expected rate of return, rB, for
Stock B (rA = 10.10%.) Do not round intermediate
calculations. Round your answer to two decimal places.
%
B.Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 22.00%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(14%)
(29%)
0.2
3
0
0.4
13
23
0.2
24
27
0.1
35
37
Calculate the expected rate of return, rB, for Stock
B (rA = 12.70%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 18.47%.) Do not round
intermediate calculations. Round your...
Expected returns Stocks A and B have the following probability distributions of expected future returns: Probability...
Expected returns
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.2
-10%
-39%
0.2
6
0
0.3
11
21
0.2
20
27
0.1
36
44
Calculate the expected rate of return, rB, for Stock
B (rA = 10.10%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 26.59%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(10%)
(35%)
0.2
3
0
0.3
11
19
0.3
19
27
0.1
32
47
Calculate the expected rate of return, rB, for Stock
B (rA = 11.80%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 21.10%.) Do not round
intermediate calculations. Round your...
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability...
EXPECTED RETURNS
Stocks A and B have the following probability distributions of
expected future returns:
Probability
A
B
0.1
(7%)
(26%)
0.2
5
0
0.3
10
24
0.3
22
28
0.1
33
40
Calculate the expected rate of return, rB, for Stock
B (rA = 13.20%.) Do not round intermediate calculations.
Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 18.62%.) Do not round
intermediate calculations. Round your...
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