Question
In: Finance
Assume analysts provide the following types of information. Assume short sales are allowed. Stock Mean Return...
Assume analysts provide the following types of information. Assume short sales are allowed.
| Stock | Mean Return | Standard Deviation |
| A | 10% | 8% |
| B | 12% | 10% |
| C | 18% | 16% |
| risk free rate | 5% |
The pairwise coefficient of correlation between all three stocks is 0.5, i.e. ρAB=ρAC=ρBC=0.5.
a) What the rate of return and the standard deviation of an equal weighted portfolio consist of all three stocks?
b) What is the minimum variance portfolio of A and B? What is the standard deviation of this portfolio? Explain briefly why the standard deviation of the portfolio is lower than that of A and B.
c) Find the weights of stock A, B and C in the efficient portfolio.
Solutions
Expert Solution
a)
b)
A minimum variance portfolio is a collection
of securities that combine to minimize the price volatility such as
standard deviation of the overall portfolio. Here the weights are
found for portfolio A and B with the help of minimum variance
portfolio, such that the standard deviation is minimised. So, the
standard deviation of the portfolio is lower than that of A and
B.
c)
jeff jeffy answered 2 years agoRelated Solutions
Assume analysts provide the following types of information. Further assume that short sales are allowed. Security...
Assume analysts provide the following types of information.
Further assume that short sales are allowed.
Security
Mean
Return
Standard
Deviation
A
10%
4%
B
12%
10%
Risk-free asset
5%
0%
It is also known that the correlation coefficient between A and
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Stock covariance with the market= 0.5
Market variance = 0.25
Stock covariance with a second risk factor= 0.6
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Using a dividend discount model, what is the price for this
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Variance of the second factor= 0.3
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assume that the return of the stock is best explained by a
two-factor model that includes the market factor and a second risk
factor. Using a dividend discount model, what is the price for this
stock?
Stock covariance with the market= 0.5
Market variance = 0.25
Stock covariance with a second risk factor= 0.6
Variance of the second factor= 0.3
Market Premium:3%
Second factor risk premium=1%
Risk free rate =2 %...
The following information is given for a stock. Investors assume that the return of the stock...
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that the return of the stock is best explained by a two-factor
model that includes the market factor and a second risk factor.
Using a dividend discount model, what is the price for this
stock?
Stock covariance with the market= 0.5
Market variance = 0.25
Stock covariance with a second risk factor= 0.6
Variance of the second factor= 0.3
Market Premium:3%
Second factor risk premium=1%
Risk free rate =2 %...
The following information is given for a stock. Investors assume that the return of the stock...
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assume that the return of the stock is best explained by a
two-factor model that includes the market factor and a second risk
factor. Using a dividend discount model, what is the price for this
stock?
Stock covariance with the market= 0.5
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Stock covariance with a second risk factor= 0.6
Variance of the second factor= 0.3
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Second factor risk premium=1%
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You are given the following information: State of Economy Return on Stock A Return on Stock...
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State of
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Return on
Stock A
Return on
Stock B
Bear
.109
−
.052
Normal
.108
.155
Bull
.080
.240
Assume each state of the economy is equally likely to happen.
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Variance
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Standard deviation
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Weight
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Correlation coefficient
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