Answered: A collection of financial assets and…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 11QTD

See similar textbooks

Related questions

Question

100%

A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the investor’s expected rate of return.

Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio.

Consider the following case:

Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table:

Stock	Percentage of Portfolio	Expected Return	Standard Deviation
Artemis Inc.	20%	6.00%	30.00%
Babish & Co.	30%	14.00%	34.00%
Cornell Industries	35%	13.00%	37.00%
Danforth Motors	15%	5.00%	39.00%

What is the expected return on Andre’s stock portfolio?

14.45%

10.70%

16.05%

8.03%

Suppose each stock in Andre’s portfolio has a correlation coefficient of 0.4 (ρ = 0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the partially diversified four-stock portfolio is 35%, the portfolio’s standard deviation (σpσp) most likely is (equal to, more than, less than) 35%.

Expert Solution