10.3 Refer to Exhibit 10.2. a. Construct an equal-weighted (50/50) portfolio of investments B and C. What are the expected rate of return and standard deviation of the portfolio? Explain your results. b. Construct an equal-weighted (50/50) portfolio of investments B and D. What are the expected rate of return and standard deviation of the portfolio? Explain your results.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 13QTD
icon
Related questions
Question
Economic Probability
State
of Occurrence
Very poor
Poor
Average
Good
Very good
0.10
0.20
0.40
0.20
0.10
1.00
Expected rate of return
Standard deviation
A
-10%
0
10
20
30
-
B
Rate of Return if State Occurs
C
D
AB
30%
20
10
0
-10
-25%
-5
15
35
55
15%
10
0
25
35
AC
-17.5%
-2.5
12.5
E(RAC) (0.5 x 10 % ) + (0.5 x 15 %) - 12.5%.
AD
10%
10
10
5.0
10 27.5
22.5
10 42.5 32.5
10.0% 10.0% 15.0% 12.0%
10.0% 12.5% 11.0%
11.0% 11.0% 21.9% 12.1% 0.0% 16.4% 10.1%
This is the same value as that calculated from the expected rates of
return of the two portfolio components:
2.5% Investments
5.0
and Three
Portfolios
EXHIBIT 10.2
Estimated
Returns for
Four Individual
Transcribed Image Text:Economic Probability State of Occurrence Very poor Poor Average Good Very good 0.10 0.20 0.40 0.20 0.10 1.00 Expected rate of return Standard deviation A -10% 0 10 20 30 - B Rate of Return if State Occurs C D AB 30% 20 10 0 -10 -25% -5 15 35 55 15% 10 0 25 35 AC -17.5% -2.5 12.5 E(RAC) (0.5 x 10 % ) + (0.5 x 15 %) - 12.5%. AD 10% 10 10 5.0 10 27.5 22.5 10 42.5 32.5 10.0% 10.0% 15.0% 12.0% 10.0% 12.5% 11.0% 11.0% 11.0% 21.9% 12.1% 0.0% 16.4% 10.1% This is the same value as that calculated from the expected rates of return of the two portfolio components: 2.5% Investments 5.0 and Three Portfolios EXHIBIT 10.2 Estimated Returns for Four Individual
10.3 Refer to Exhibit 10.2.
a. Construct an equal-weighted (50/50) portfolio of investments
B and C. What are the expected rate of return and standard
deviation of the portfolio? Explain your results.
b. Construct an equal-weighted (50/50) portfolio of investments
B and D. What are the expected rate of return and standard
deviation of the portfolio? Explain your results.
Transcribed Image Text:10.3 Refer to Exhibit 10.2. a. Construct an equal-weighted (50/50) portfolio of investments B and C. What are the expected rate of return and standard deviation of the portfolio? Explain your results. b. Construct an equal-weighted (50/50) portfolio of investments B and D. What are the expected rate of return and standard deviation of the portfolio? Explain your results.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 4 images

Blurred answer
Knowledge Booster
Optimal Portfolio
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
EBK CFIN
EBK CFIN
Finance
ISBN:
9781337671743
Author:
BESLEY
Publisher:
CENGAGE LEARNING - CONSIGNMENT