Question

In: Finance

Your stock portfolio consists of two American companies; Apple Inc. and Ford Motor Company. You are...

Your stock portfolio consists of two American companies; Apple Inc. and Ford Motor Company. You are living in Australia and those shares are purchased in the USD. During the last 12 months, Apple’s stock went up by 40%, while Ford went down by 30%. During the same period, the USD went up by 3% against the AUD. Assume that you have invested 60% of your money into Apple and allocated 40% of your money into Ford. Furthermore, assume that the standard deviations of stock returns are 5% for Apple and 7% for Ford, and the correlation coefficient between the two stock is 0.6. (a) What is the portfolio’s return over the 12 months in the USD, (b) what is its return in the AUD, and (c) what is the standard deviation of your portfolio return? Provide all the workings (use up to 3 decimal places).

Solutions

Expert Solution

Let's first write down the information provided:

Apple Ford
Weights 60% 40%
Return 40% -30%
Standard Deviation 5% 7%

Correlation coefficient: 0.6
USD appreciation: 3%

Let the weights 60% and 40% be denoted by w1 and w2. Further, let R1 and R2 represent the returns from Apple and Ford, respectively and s1 and s2 their respective standard deviations.

a. Portfolio Return (USD)

The return on the portfolio RP can be calculated as

RP = w1R1 + w2R2 = 0.600 x 0.400 + 0.400 x (-0.300) = 0.240 - 0.120 = 0.120 or 12.000%.
This is the portfolio return in USD.

b. Portfolio Return (AUD)

For calculating the portfolio return in AUD, we can use the below formula.

Portfolio return in domestic currency = [(1 + Portfolio return in the invested currency) / (1 - Rate of appreciation of the invested currency)] - 1

Please note that if the invested currency depreciates against the domestic currency, we will use (1 + Rate of depreciation) in the above formula.

Here, the invested currency is USD and the domestic currency is AUD. During the 12-month holding period, USD appreciated by 3%. So,

portfolio return in domestic currency = [(1 + 0.120) / (1 - 0.030)] - 1 = [1.120 / 0.970] -1 = 1.155 - 1 = 0.155 or 15.464%

c. Portfolio Standard Deviation

Variance of the portfolio can be calculated using the formula

Var = w12s12 + w22s22 + 2w1w2Cov(R1R2)

where Cov(R1R2) is the covariance in the returns of Apple and Ford which, in turn, can be calculated as

Cov(R1R2) = Correlation coefficient x s1 x s2 = 0.600 x 5.000 x 7.000 = 21.

Please note that in the calculation of portfolio standard deviation, we are not converting the standard deviation into decimals and rather, we will be keeping them as whole numbers.

So, Var = (0.600)2(5.000)2 + (0.400)2(7.000)2 + 2(0.600)(0.400)(21.000)
= (0.360)(25.000) + (0.160)(49.000) + 10.080
= 9.000 + 7.840 + 10.080
= 26.920

The portfolio variance is 26.920, so the standard deviation of the portfolio is (26.920)1/2 = 5.188%



Related Solutions

Give a feedback A company that operates internationally is Apple inc. Apple Inc is an American...
Give a feedback A company that operates internationally is Apple inc. Apple Inc is an American multinational technology company. Based on the article ‘’Apple Globalization and Global Strategic Planning Assignment’’, the author stated that Apple Inc uses differentiation strategy as its major international strategy to deliver high customer value through its innovation brands in their overseas market. With the help of this strategy, the organization has developed a strong market that is share in overseas market. Throughout the years, Apple...
As an energetic executive at Ford Motor Company, you are ready to compile your additional findings...
As an energetic executive at Ford Motor Company, you are ready to compile your additional findings in order to present your conclusions before a board of investors. For the final part of your course project, questions are provided below for you to incorporate into your final presentation to include: What type of good and/or service does Ford Motor Company produce and/or provide? Describe factors that lead to the market failure of Ford Motor Company? Explain whether the involvement of the...
Emmy is analyzing a two-stock portfolio that consists of a Utility stock and a Commodity stock....
Emmy is analyzing a two-stock portfolio that consists of a Utility stock and a Commodity stock. She knows that the return on the Utility stock has a standard deviation of 40 percent and the return on the Commodity stock has a standard deviation of 30 percent. However, she does not know the exact covariance in the returns of the two stocks. Emmy would like to plot the variance of the portfolio for each of three cases—covariance of 0.050, 0, and...
Emmy is analyzing a two-stock portfolio that consists of a Utility stock and a Commodity stock....
Emmy is analyzing a two-stock portfolio that consists of a Utility stock and a Commodity stock. She knows that the return on the Utility stock has a standard deviation of 40 percent and the return on the Commodity stock has a standard deviation of 30 percent. However, she does not know the exact covariance in the returns of the two stocks. Emmy would like to plot the variance of the portfolio for each of three cases—covariance of 0.115, 0, and...
Emmy is analyzing a two-stock portfolio that consists of a Utility stock and a Commodity stock....
Emmy is analyzing a two-stock portfolio that consists of a Utility stock and a Commodity stock. She knows that the return on the Utility stock has a standard deviation of 40 percent and the return on the Commodity stock has a standard deviation of 30 percent. However, she does not know the exact covariance in the returns of the two stocks. Emmy would like to plot the variance of the portfolio for each of three cases—covariance of 0.010, 0, and...
Shares of stock in the Ford Motor Company reached a low of $1.43 on November 10,...
Shares of stock in the Ford Motor Company reached a low of $1.43 on November 10, 2008. One year later, the stock closed at $8.41. If you had invested $20,000 in Ford stock on 11/10/08, buying as many shares as possible while paying an online brokerage fee of $19.99 for the purchase, then sold the stock a year later with the same fee, how much profit would you have made? How much money would you have made per day for...
How do General Motor and Ford Motor companies account for their property,plant and equipment? compare and...
How do General Motor and Ford Motor companies account for their property,plant and equipment? compare and contrast
Your portfolio consists of 1,000 shares of stock A and 1,000 shares of stock B. At...
Your portfolio consists of 1,000 shares of stock A and 1,000 shares of stock B. At today's market open their respective prices per share are $7.50 and $21. What are their respective weights in the portfolio at today's market open prices? (rounded to two decimals). They have equal weights 0.40 and 0.60 0.35 and 0.65 0.26 and 0.74. 1 points    QUESTION 32 What is your portfolio's beta if stock A's beta is 1.8 and that of B is 0.4....
Ford Motor Co. and TheFacebook, Inc. have both created dual classes of stock so that
Ford Motor Co. and TheFacebook, Inc. have both created dual classes of stock so that the founders can continue to control their company even after it goes public. Should corporate laws permit this? Should some shareholders be more equal than others? If the founders want to control a company, why shouldn’t they buy enough regular stock to do so?
in your two-stock portfolio, you invest $25 in stock a and $75 in stock B. if...
in your two-stock portfolio, you invest $25 in stock a and $75 in stock B. if the beta of stock A is 1.31 and the beta of stock b is 1.39 your portfolio wold be:
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT