Each year, Google stock has a return of 10% and 20% with equal probability, and Apple...

Each year, Google stock has a return of 10% and 20% with equal probability, and Apple stock has a return of -10% and 15% with equal probability. The correlation between Google stock return and Apple stock return is 0.8. The risk free rate is 5%.(Note that for each question, you need to show the calculation to earn full credit)

a) What is the standard deviation of Google stock’s return?

b) What is the standard deviation of Apple stock’s return? You decide to invest in Google for the first year, Apple for the second year, and the risk-free asset in the third year.

c) What is the expected final return at the end of the third year? You decide to investment $2000 in Google stock, -$1000 in Apple stock, and $1000 in the risk-free asset. You will hold your portfolio for just one year.

d) What is the expected return of your portfolio?

e) What is the standard deviation of your portfolio’s return?

f) What is the Sharpe ratio of your portfolio’s return? You have a bond fund P, and you’re considering whether to add Google stock into your portfolio. Assume the bond fund has an expected return of 6%, a volatility of 2% and the covariance between the bond fund and the google Stock return is 0.01.

g) What is the beta of Google stock’s return with respect to bond fund P?

h. Will adding Google stock increase your portfolio’s Sharpe ratio? You need to show the calculation to earn the credit.

Expert Solution

jeff jeffy answered 2 years ago

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