Question

In: Finance

(Computingthe standard deviation for a portfolio of two risky​ investments)Mary Guilott recently graduated from Nichols State...

(Computingthe standard deviation for a portfolio of two risky investments)Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school.​ Specifically,she is evaluating an investment in a portfolio comprised of two​ firms'common stock. She has collected the following information about the common stock of Firm A and Firm​ B:

Expected Return

Standard Deviation

Firm A's Common Stock

0.17

0.16

Firm B's Common Stock

0.18

0.25

Correlation Coefficient

0.4

a. If Mary invests half her money in each of the two common​ stocks,what is the​ portfolio'sexpected rate of return and standard deviation in portfolio​ return?

b. Answer part a where the correlation between the two common stock investments is equal to zero.

c. Answer part a where the correlation between the two common stock investments is equal to +1.

d. Answer part a where the correlation between the two common stock investments is equal to −1.

e. Using your responses to questionsa—d​,describe the relationship between the correlation and the risk and return of the portfolio.

Solutions

Expert Solution


Related Solutions

​(Computing the standard deviation for a portfolio of two risky​ investments) Mary Guilott recently graduated from...
​(Computing the standard deviation for a portfolio of two risky​ investments) Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school.​ Specifically, she is evaluating an investment in a portfolio comprised of two​ firms' common stock. She has collected the following information about the common stock of Firm A and Firm​ B:             Expected Return           Standard Deviation Firm A's Common Stock...
Computing the standard deviation for a portfolio of two risky​ investments) Mary Guillot recently graduated from...
Computing the standard deviation for a portfolio of two risky​ investments) Mary Guillot recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school.​ Specifically, she is evaluating an investment in a portfolio comprised of two​ firms' common stock. She has collected the following information about the common stock of Firm A and Firm​ B: Expected           Return             Standard Deviation Firm​ A's common stock 0.170.17...
Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager...
Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school.​ Specifically, she is evaluating an investment in a portfolio comprised of two​ firms' common stock. She has collected the following information about the common stock of Firm A and Firm​ B: Expected Return Standard Deviation Firm A Common Stock .16 .17 Firm B Common Stock .17 .24 Correlation Coefficient .50 a....
Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager...
Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school.? Specifically, she is evaluating an investment in a portfolio comprised of two? firms' common stock. She has collected the following information about the common stock of Firm A and Firm? B:     Expected Return   Standard Deviation Firm A's Common Stock   0.16   0.16 Firm B's Common Stock   0.18   0.24 Correlation Coefficient   0.40   ...
Mary Guilott recently graduated from college and is evaluating an investment in two? companies' common stock....
Mary Guilott recently graduated from college and is evaluating an investment in two? companies' common stock. She has collected the following information about the common stock of Firm A and Firm? B: Expected?????????? Returns??????????? Standard Deviation Firm? A's common stock 0.16 0.14 Firm? B's common stock 0.07 0.05 Correlation coefficient 0.20 a. If Mary decides to invest 10 percent of her money in Firm? A's common stock and 90 percent in Firm? B's common? stock, what is the expected rate...
Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school
Mary Guilott recently graduated from Nichols State University and is anxious to begin investing her meager savings as a way of applying what she has learned in business school. Specifically, she is evaluating an investment in a portfolio comprised of two firms' common stock. She has collected the following information about the common stock of Firm A and Firm B:Expected ReturnStandard DeviationFirm A's Common Stock0.150.18Firm B's Common Stock0.160.22Correlation Coefficient0.7a. If Mary decides to invest 50% of her money in Firm...
1. Portfolio theory defines risky investments in 2 ways expected returns and variance ( Standard deviation)...
1. Portfolio theory defines risky investments in 2 ways expected returns and variance ( Standard deviation) of expected returns. What assumptions need to be made about investors and the expected investment returns in this 2 factor approach and state if they are justified in real life. 2. What can be said about the portfolio that is represented by any point along the efficient frontier of risky investment portfolios? 3. What is meant by two fund separation? 4. The capital asset...
An investor can design a risky portfolio based on two stocks, The standard deviation of return...
An investor can design a risky portfolio based on two stocks, The standard deviation of return on stock A is 24% while the standard deviation on stock B is 14%. The correlation coefficient between the return on A and B is 0.35. The expected return on stock A is 25% while on stock B it is 11%. What is the proportion of the minimum variance portfolio that would be invested in stock B? When solving this problem, make sure you...
The standard deviation of a portfolio will tend to increase when: A. a risky asset in...
The standard deviation of a portfolio will tend to increase when: A. a risky asset in the portfolio is replaced with U.S. Treasury bills. B. one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry. C. the portfolio concentration in a single cyclical industry increases. D. the weights of the various diverse securities become more evenly distributed. E. short-term bonds are replaced with Treasury Bills.
Astrid has the following two investments in her portfolio: Investment Expected Return    Standard Deviation   ...
Astrid has the following two investments in her portfolio: Investment Expected Return    Standard Deviation    Beta % Weighting M 12% 3.1% 1.40 55% N 19% 3.9 0.85 45 Which investment is riskier by itself and in a portfolio sense? What is the expected return of the portfolio? With a correlation coefficient of +0.30, what is the standard deviation of the portfolio? What is the beta of the portfolio? What is the significance of the results in parts a through...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT