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 7 months 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...
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
fund and the rest (1-y) in the T-bill money market fund. His
overall portfolio will have an expected rate of return of 15% What
is the proportion y? What is the standard deviation of the rate of
return on your client’s portfolio?
Consider the following information: A risky portfolio contains two risky assets. The expected return and standard...
Consider the following information:
A risky portfolio contains two risky assets.
The expected return and standard deviation for the first risky
asset is 18% and 25%, respectively.
The expected return and standard deviation for the second risky
asset is 18% and 25%, respectively.
The correlation between the two risky assets is .55.
The expected on the 10-year Treasury bond is 3%.
Find the minimum variance portfolio. Make sure to provide the
weights, excepted return, and standard deviation of the portfolio...
Suppose your optimal risky portfolio has an expected return E(rp) = 6.5% and standard deviation as...
Suppose your optimal risky portfolio has an expected return
E(rp) = 6.5% and standard deviation as 6%. You can also invest in a
risk-free asset with rf = 3.5%. Your risk aversion A = 1/15.
(a) Calculate the Sharpe ratio.
(b) What is the expected return for your complete portfolio, if
the standard deviation is 3%?
(c) What is the optimal allocation that maximizes your utility?
Write down the portion (in a number between 0 and 1, or greater
than...
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