Question

In: Finance

Suppose an investor starts with a portfolio consisting of one randomly selected stock. As more and...

Suppose an investor starts with a portfolio consisting of one randomly selected stock. As more and more randomly selected stocks are added to the portfolio, what happens to the portfolio’s risk? Explain the formula that relates total risk, market risk, and diversifiable risk.

Solutions

Expert Solution


Related Solutions

Suppose an investor starts with a portfolio consisting of onerandomly selected stock. As more and...
Suppose an investor starts with a portfolio consisting of one randomly selected stock. As more and more randomly selected stocks are added to the portfolio, what happens to the portfolio’s risk? Explain the formula that relates total risk, market risk, and diversifiable risk.
An investor holding a certain portfolio consisting of two stocks invests 20% in Stock A and...
An investor holding a certain portfolio consisting of two stocks invests 20% in Stock A and 80% in Stock B. The expected return from Stock A is 4% and that from Stock B is 12%. The standard deviations are 8% and 10% for Stocks A and B respectively. Compute the expected return of the portfolio. b) Compute the standard deviation of the portfolio assuming the correlation between the two stocks is 0.75. c) Compute the standard deviation of the portfolio...
Suppose an investor creates a portfolio of two assets: Stock A and Stock B. Calculate the...
Suppose an investor creates a portfolio of two assets: Stock A and Stock B. Calculate the expected return on the minimum variance portoflio. (Enter percentages as decimals and round to 4 decimals) State Prob(State) Stock A Stock B Stock C Boom 30% -12% 16% -3% Modest Growth 50% 30% 5% -1% Recession 20% -12% -1% 25%
Consider a portfolio consisting of a long position in one stock and a short position in...
Consider a portfolio consisting of a long position in one stock and a short position in two call options. Both the current stock price (S0) and the exercise price (K) of call options are $20. The call option costs $3. a) Construct a table showing the payoffs and net profits for all possible price ranges. b) Draw a diagram showing the variation of an investor’s net profit with the terminal stock price c) For what price range does this portfolio...
Consider a portfolio consisting of a long position in one stock and a short position in...
Consider a portfolio consisting of a long position in one stock and a short position in two call options. Both the current stock price (S0) and the exercise price (K) of call options are $20. The call option costs $3. a) Construct a table showing the payoffs and net profits for all possible price ranges. b) Draw a diagram showing the variation of an investor’s net profit with the terminal stock price c) For what price range does this portfolio...
Consider a portfolio consisting of a long position in one stock and a short position in...
Consider a portfolio consisting of a long position in one stock and a short position in two call options. Both the current stock price (S0) and the exercise price (K) of call options are $20. The call option costs $3. a) Construct a table showing the payoffs and net profits for all possible price ranges. b) Draw a diagram showing the variation of an investor’s net profit with the terminal stock price c) For what price range does this portfolio...
Suppose you have a portfolio consisting of two stocks, Stock S and Stock T. $4,000 is...
Suppose you have a portfolio consisting of two stocks, Stock S and Stock T. $4,000 is invested in Stock S and $6,000 is invested in Stock T: State               Probability                 Stock S            Stock T Boom              0.10                             21%                 35% Normal            ?                                  6%                   11% Recession        0.60                             -17%               -40% What is the standard deviation of Stock S? 0.195194 0.186379 0.168237 0.142076 0.137335 What is the portfolio variance? 0.117452 0.093821 0.051505 0.043497 0.038826
A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index...
A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and 18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds. What is the standard deviation of the proposed portfolio?
An investor owns a portfolio consisting of two mutual funds, A and B, with 50% invested...
An investor owns a portfolio consisting of two mutual funds, A and B, with 50% invested in A. The following table lists the inputs for these funds. Measures Fund A Fund B Expected value 10 7 Variance 68 43 Covariance 25 a. Calculate the expected value for the portfolio return. (Round your answer to 2 decimal places.) Expected Value: b. Calculate the standard deviation for the portfolio return. (Round intermediate calculations to at least 4 decimal places. Round your final...
Consider a portfolio consisting of $100,000 worth of Stock A and $300,000 worth of Stock B....
Consider a portfolio consisting of $100,000 worth of Stock A and $300,000 worth of Stock B. The standard deviations of the portfolio’s, Stock A’s, and Stock B’s returns are σp = 8.4%, σA = 8.0%, and σB = 9.7% respectively. Calculate the correlation coefficient ρA,B between rA and rB . State your answer with 4 digits after the decimal point.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT