Question

In: Finance

Fund A offer an expected return of 8% with a standard deviation of 15%, and Fund...

Fund A offer an expected return of 8% with a standard deviation of 15%, and Fund B offers an

expected return of 5% with a standard deviation of 25%.

a. Would Fund B be held by investors?Explainwith the aid of a diagram using Markowitz Portfoliotheory.(8marks)

b. How would you answer part a. if the correlation coefficient between Funds A and B were 1? Could these expected returnsand standard deviationsrepresent an equilibrium in the market?(12marks)

Solutions

Expert Solution

Answer:

(a) Fund A:
Expected Return = 8%
Standard Deviation (risk)= 15%

Fund B:
Expected Return = 5%
Standard Deviation (risk) = 25%

Since, the Fund A offers higher return at a lower risk as compared to the Fund B which offers lower return and more risk. Therefore, the Fund B should not be held by the investors.

(b) If the correlation of coeeficient between Fund A and Fund B is 1, it reflects that A & B have perfect positive correlation between them.

[Since, the weights are not given, therefore, we have assumed weights to be 0.50 for each fund]

Therefore, the risk of the portfolio = weighted average of the risk = 0.50*15 + 0.50*25 = 20%
And expected return of the portfolio = weighted average of returns = 0.50*8 + 0.50*5 = 6.5%

This portfolio has lower returns and higher risk as compared to the Fund A. Therefore, Fund A is preferrable to the investor.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Asset A has an expected return of 15% and standard deviation of 20%. Asset B has an expected return of 20% and standard deviation of 15%.
      1. Asset A has an expected return of 15% and standard deviation of 20%. Asset B has an expected return of 20% and standard deviation of 15%. The riskfree rate is 5%. A risk-averse investor would prefer a portfolio using the risk-free asset and _______.            A) asset A            B) asset B            C) no risky asset            D) cannot tell from data provided2. The Sharpe-ratio is useful for            A) borrowing capital for investing            B) investing available capital            C) correctly...
                Expected Return     Standard Deviation Stock fund (S)             20%     &nbsp
                Expected Return     Standard Deviation Stock fund (S)             20%                          30% Bond fund (B)             12%                          15%   Correlation = .10 7. If you were to use only the two risky funds, and still require an expected return of 14%, what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimized portfolio in Problem 9. What do you conclude? Problem 9 Stock Expected Return         Standard Deviation A            10%                                     5% B...
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...
Stocks offer an expected return of 18%, with a standard deviation 22%. Gold offers an expected...
Stocks offer an expected return of 18%, with a standard deviation 22%. Gold offers an expected return of 10% with a standard deviation of 30%. a) In the light of the apparent inferiority of gold with respect to both mean and return volatility, would anyone hold gold? b) Re-answer (a) with the additional assumption that the correlation coefficient between gold and stocks equals 1. Explain why one would or would not hold gold in one’s portfolio. Could this set of...
Given the following information: Expected return on Stock A .15 (15%) Standard deviation of return 0.3...
Given the following information: Expected return on Stock A .15 (15%) Standard deviation of return 0.3 Expected return on Stock B .18 (18%) Standard deviation of return 0.4 Correlation coefficient of the returns on Stock A and Stock B 0.75 a. What are the expected returns and standard deviations of the following portfolios? 1. 100 percent of funds invested in Stock A 2. 100 percent of funds invested in Stock B 3. 50 percent of funds invested in each stock?...
Given the following information: Expected return on Stock A .15 (15%) Standard deviation of return 0.3...
Given the following information: Expected return on Stock A .15 (15%) Standard deviation of return 0.3 Expected return on Stock B .18 (18%) Standard deviation of return 0.4 Correlation coefficient of the returns on Stock A and Stock B 0.75 a. What are the expected returns and standard deviations of the following portfolios? 1. 100 percent of funds invested in Stock A 2. 100 percent of funds invested in Stock B 3. 50 percent of funds invested in each stock?...
Problem 1. Stocks offer an expected rate of return of 18%, with a standard deviation of...
Problem 1. Stocks offer an expected rate of return of 18%, with a standard deviation of 22%. Gold offers an expected return of 10% with a standard deviation of 30%. a) In light of the apparent inferiority of gold with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so. b) Given the data above, reanswer a) with the additional assumption that the correlation coefficient between gold and stocks equals...
The expected return on stock W is 10% and its standard deviation is 15%.
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%.a)     calculate expected return and standard deviation of a portfolio that invests 40% in W and 60% in V.b)    determine the minimum variance combination of W and V and determine its expected return and standard deviation.c)     If the risk-free rate is 4%, determine the...
expected return and standard deviation of a bond fund b is 4% and 9%, respectively. The...
expected return and standard deviation of a bond fund b is 4% and 9%, respectively. The expected return and standard deviation of a stock fund s is 12% and 25%, respectively. The correlation between two fund returns is 0.1. What is the standard deviation of a portfolio that invests 40% in s and the rest in b?
Consider the following two assets: Asset A’s expected return is 15% and return standard deviation is...
Consider the following two assets: Asset A’s expected return is 15% and return standard deviation is 20%. Asset B’s expected return is 10% and return standard deviation is 15%. The correlation between assets A and B is 0.5. (a) w1=0.75, w2=.50, find out expected returns and SD/VARIANCE (b) Instead of a correlation of 0.5 between assets A and B, consider a correlation of - 0.5 and re-compute the above.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT