Question

In: Finance

Using the data in the following table, answer parts (i) – (v). Year Stock X Stock...

Using the data in the following table, answer parts (i) – (v).

Year	Stock X	Stock Y
2012	-11%	-5%
2013	15%	25%
2014	10%	15%
2015	-5%	-15%
2016	5%	-5%
2017	8%	-2%
2018	7%	10%
2019	5%	15%

Average return
Standard deviation
Correlation between Stock X and Stock Y	0.7567

Estimate the average return for each stock.
Calculate the standard deviation of returns for Stocks X and Y.
For a portfolio that is 75% weighted in Stock X, and 25% weighted in Stock Y, calculate the expected return of the portfolio.
Calculate the standard deviation of your portfolio based on the weights of Stocks X and Y stated in part (iii).
Suppose the correlation between Stocks X and Y has reduced to 0.35, does it increase or reduce the standard deviation of your portfolio based on the weights of Stocks X and Y stated in part (iii). Explain your answer.

Solutions

Expert Solution

i. The average return for stock X, is

= 4.25%

The average return for stock Y, is

= 4.75%

Hence, the average return for stock X is 4.25 and stock Y is 4.75%.

---------------------------------------------------------------------------------------------------------------------

ii. The standard deviation for stock X, is

= 8.362

The standard deviation for stock Y, is

= 13.488

Hence, the standard deviation for stock X is 8.362% and stock Y is 13.488%.

------------------------------------------------------------------------------------------------------------------------------------

iii. The expected return of the portfolio, is

= 4.375%

Therefore, the expected return of the portfolio is 4.375% .

--------------------------------------------------------------------------------------------------------------------------------

iv. The standard deviation of the portfolio, is

= 9.095%

Therefore, the standard deviation of the portfolio is 9.095%

-----------------------------------------------------------------------------------------------------------------------------

v. If the correlation is reduced to 0.35, we compute the standard deviation

= 8.094%

Thus, we can say that when the correlation is reduced to 0.35, the standard deviation of the portfolio is also reduced.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Using the following stock data for GRMN and LMT, Answer the following questions. (Show Work). Stock...

Using the following stock data for GRMN and LMT, Answer the following questions. (Show Work). Stock GRMN LMT Mean 100.05 99.79 Standard Deviation 1.10 1.47 Sample Size 62 62 a. Calculate the 95% two-sample confidence interval. What can be determined from this confidence interval. Is the difference in stock price significantly different from 0? b. Conduct a two-sample t-test using an alpha value of 0.05. c. If there was a significant difference between GRMN and LMT, What is the probability...

Using the data in the following table, estimate the average return and volatility for each stock....

Using the data in the following table, estimate the average return and volatility for each stock. Year Stock A Stock b 2008 -5% 15% 2009 19% 31% 2010 10% 4% 2011 -4% .5% 2012 3% -9% 2013 15% 23% What is the variance of stock a? Stock b?

Use the information for securities X, Y and Z in the table below to answer parts...

Use the information for securities X, Y and Z in the table below to answer parts a and b. Security X Security Y Security Z Expected return 8% 8% 17% Beta 0.7 1.3 2.5 The risk-free rate is 2% and the expected return of the market portfolio is 8%. According to the CAPM, are these securities overpriced, fairly priced or underpriced? Using the CAPM, calculate the abnormal return of a portfolio that takes a long position in security X by...

Use the information for securities X, Y and Z in the table below to answer parts...

Use the information for securities X, Y and Z in the table below to answer parts a and b: Security X Security Y Security Z Expected return 8% 8% 17% Beta 0.7 1.3 2.5 The risk-free rate is 2% and the expected return of the market portfolio is 8%. According to the CAPM, are these securities overpriced, fairly priced or underpriced? Using the CAPM, calculate the abnormal return of a portfolio that takes a long position in security X by...

Calculate the breakeven point using the following data. Create a table and graph with the answer...

Calculate the breakeven point using the following data. Create a table and graph with the answer you get. Fixed Costs: App Development Costs: $150,000 Marketing Costs: $72,000 Variable Costs: Average Cost Per Install (CPI) – $2.89 / install Cost Per Action (CPA): Register – $4.58 / install CPA: Register: In-app purchase – $102 / install CPA: Purchase – $40 / install CPA: Subscribe – $87 / install Sales Price: App membership subscription: $10 per person or $5 per student

Let V be a Hilbert space. Let f(x) = ∥x∥ for x ∈ V. Using the...

Let V be a Hilbert space. Let f(x) = ∥x∥ for x ∈ V. Using the definition of Frechet differentiation, show that ∇f(x) = x for all x ̸= 0. Furthermore, show that f(x) is not Frechet differentiable at x = 0.

The following table contains data for the U.S. balance of payments in a prior year. Answer...

The following table contains data for the U.S. balance of payments in a prior year. Answer the question on the basis of this information. All figures are in billions of dollars. U.S. goods exports +$793 U.S. goods imports -1573 U.S. exports of service +280 U.S. imports of services -222 Net investment income +5 Net transfers -81 Capital account -5 Foreign purchases of assets in the U.S. +1198 U.S. purchases of foreign assets -395 Refer to the table above. The data...

Use the data in the table below to complete parts (a) through (c). X: 5 5...

Use the data in the table below to complete parts (a) through (c). X: 5 5 6 9 13 16 18 48 Y: 30 27 18 23 25 20 21 10 A.) Construct a scatterplot of the data. B.) Indentify any possible outliners. A.) The point (18,21) may be an outliner. B.) The point (48,10) may be an outliner C.) The point (5,27) may be an outliner. D.) The point (5,30) may be an outliner E.) There are no outliners....

Use the end-of-year stock price data in the popup window, (data below) to answer the following...

Use the end-of-year stock price data in the popup window, (data below) to answer the following questions for the Harris and Pinwheel companies. a. Compute the annual rates of return for each time period and for both firms. b. Calculate both the arithmetic and the geometric mean rates of return for the entire three-year period using your annual rates of return from part a. (Note: you may assume that neither firm pays any dividends.) c. Compute a three-year rate of...

Using the following data... (a) Fill in the table: X Y X2 Y2 XY 8 5...

Using the following data... (a) Fill in the table: X Y X2 Y2 XY 8 5 4 3 9 7 7 6 5 6 ΣX = ΣY = ΣX2 = ΣY2 = ΣXY = (b) Compute the degrees of freedom and determine the critical value of r for α = 0.05 (two-tails). df = r-critical = (c) Compute SSX, SSY, SP, and the Pearson correlation (r). (Use 3 decimals) SSX = SSY = SP = r = (d) What decision...

Subjects