Question
In: Finance
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 |
0.190.19 |
|
|
Firm B's common stock |
0.180.18 |
0.240.24 |
|
|
Correlation coefficient |
0.400.40 |
||
a. If Mary invests half her money in each of the two common stocks, what are the portfolio's expected 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 plus1.
d. Answer part a where the correlation between the two common stock investments is equal to minus1.
e. Using your responses to questions along dashed, describe the relationship between the correlation and the risk and return of the portfolio.
Solutions
jeff jeffy answered 1 year agoRelated 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...
(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...
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.
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...
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...
Assume you manage a risky portfolio with an expected return of 8% and a standard deviation...
Assume you manage a risky portfolio with an expected return of
8% and a standard deviation of 21%. The T-bill rate is 2%. Your
client chooses to invest 60% of a portfolio in your fund and 40% in
a T-bill money market fund. What is the standard deviation of your
client's portfolio. convert you answer into percentages and round
to ONE decimal point.
Assume you manage a risky portfolio with an expected return of 17% and a standard deviation...
Assume you manage a risky portfolio with an expected return of
17% and a standard deviation of 27%. The T-bill rate is 7%. Your
client chooses to invest a proportion (y) of his portfolio in your
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You manage a risky portfolio with expected rate of return of 12% and a standard deviation...
You manage a risky portfolio with expected rate of
return of 12% and a standard deviation of 24%. The
T-bill rate is 3%.
Suppose that your client decides to invest in your portfolio a
proportion, y, of the total investment budget so that the overall
portfolio will have an expected rate of return of
8.40%.
What is the proportion y?
What is the standard deviation of the rate of return on your
client’s portfolio at this new level y?
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