WeVest Financial Advisors suggests an investment in two stocks (40% in Stock A and 60% in...

Year	Returns (%)
Year	Stock A			Stock B
2012		14.82	%		10.76	%
2013		15.72			11.82
2014		12.61			10.43
2015		10.84			11.96
2016		11.32			7.66

a. Using a 40/60 split, what is the weighted average standard deviation of the two stocks? (Enter your answer as a percent rounded to two decimal places.)

Weighted Average Standard Deviation

b. Recalculate the standard deviation of a portfolio of the two stocks. (Enter your answer as a percent rounded to two decimal places.)

Portfolio standard deviation

c. What is the reduction in standard deviation that results from the creation of a portfolio of the two stocks? (Enter your answer as a percent rounded to two decimal places.)

Reduction in standard deviation

Solutions

Expert Solution

Formulas for above values are as follows:

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

WeVest Financial Advisors suggests an investment in two stocks (40% in Stock A and 60% in...

WeVest Financial Advisors suggests an investment in two stocks (40% in Stock A and 60% in Stock B). They claim the investment will reduce risk through diversification, but they need proof. This is the historical returns for the two stocks. Year Returns (%) Stock A Stock B 2012 15.47 % 13.36 % 2013 16.50 15.20 2014 12.09 7.31 2015 10.45 10.01 2016 10.80 5.71 a. Using a 40/60 split, what is the weighted average standard deviation of the two stocks?...

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows. Economic Condition Market Segment Improving Stable Declining Computers 9 3 −4 Financial 8 4 −3 Manufacturing 5 5 −2 Pharmaceuticals 5 4 −1 (a) Assume that an individual investor wants to select...

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Economic Condition Market Segment Improving Stable Declining Computers 10 2 -4 Financial 8 5 -3 Manufacturing 6 4 -2 Pharmaceuticals 6 5 -1 (a) Assume that an individual investor wants to select...

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Economic Condition Market Segment Improving Stable Declining Computers 10 2 -4 Financial 8 5 -3 Manufacturing 6 4 -2 Pharmaceuticals 6 5 -1 a. Assume that an individual investor wants to select...

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Economic Condition Market Segment Improving Stable Declining Computers 10 2 -4 Financial 8 5 -3 Manufacturing 8 4 -2 Pharmaceuticals 6 5 -1 (a) Assume that an individual investor wants to select...

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals....

Investment advisors estimated the stock market returns for four market segments: computers, financial, manufacturing, and pharmaceuticals. Annual return projections vary depending on whether the general economic conditions are improving, stable, or declining. The anticipated annual return percentages for each market segment under each economic condition are as follows: Economic Condition Market Segment Improving Stable Declining Computers 10 2 -4 Financial 8 5 -3 Manufacturing 6 4 -2 Pharmaceuticals 6 5 -1 (a) Assume that an individual investor wants to select...

You are considering an investment in the stock market and have identified two potential stocks

Risk and return You are considering an investment in the stock market and have identified two potential stocks, they are Rio Tinto (NYSE: RIO) and Amazon (NASDAQ: AMZN). The year-end historical prices for the years 2010 to 2018 are shown in the table below. YearRio TintoAmazon201048.51125.41201169.48169.64201260.46194.44201356.47264.27201453.15358.69201544.13354.53201624.65587.00201744.79823.48201856.111450.891. Which stocks would you prefer to own? Would every rational investor make the same choice? Explain your answer(s). 2. Calculate the covariance and correlation coefficient between the two stocks. Does it appear that a portfolio consisting of...

You are considering an investment in the stock market and have identified two potential stocks, they...

You are considering an investment in the stock market and have identified two potential stocks, they are Rio Tinto (NYSE: RIO) and Amazon (NASDAQ: AMZN). The historical prices for the past 10 years are shown in the table below. Year Rio Tinto Amazon 2010 48.51 125.41 2011 69.48 169.64 2012 60.46 194.44 2013 56.47 264.27 2014 53.15 358.69 2015 44.13 354.53 2016 24.65 587.00 2017 44.79 823.48 2018 56.11 1450.89 1. Which stocks would you prefer to own? Would everyone...

You proposed a portfolio for your client with 60% in stock A and 40% in stock...

You proposed a portfolio for your client with 60% in stock A and 40% in stock B. Stock A has an average weekly return of 0.88% and stock B has an average weekly return of 1.32%. Beta for stock A and B are 0.8 and 1.3 respectively. Now you want to deliver a performance report to the client regarding portfolio performance on a weekly basis. (a). What’s the portfolio average weekly return? (b). What’s the portfolio beta? (c). You have...

A firm raises capital with issuing debt (60%) and prefer stocks (40%). It will sell a...

A firm raises capital with issuing debt (60%) and prefer stocks (40%). It will sell a 12-year bond with 9% coupon rate that will semiannually be paid. The firm is about to sell prefer stock that has $100 par value and pays 12.8 % of par value as dividend per year. Its current BOND price is set to $120 and floatation cost of this issuance is 3%. (tax rate is 40%) Compute cost of debt Compute cost of prefer stock...

Subjects