2 (Computing the standard devlation for a portfolio of two risky Investments) Mary Guilott recently graduated from Nichols StateUniversity 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 followinginformation about the common stock of Firm A and Firm B: .a. If Mary invests half her money in each of the two common stocks, what is the portfolio's expected rate of return and standard deviationin 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 + 1.d. Answer part a where the correlation between the two common stock investments is equal to - 1.e. Using your responses to questions a-d, describe the relationship between the correlation and the risk and return of the portfolio.c. Ibetrrelation coefficientData Table- XThed. IbetExpectedReturnStandardDevlationrolation coefficientFirm A's common stockFirm B's common stockThe0.150.160.180.25Correlation coefficiente. Uthe0.50(Click on the icon in order to copy its contonts into a spreadsheet.)he correlation andcient is toPrintDonecient is to one,O D. The correlation coefficient has no effect on the expected return of a portfolio, but the closer the correlation coefficient is tonegative one,-1, the lower the riskon coefficient is topafexe t

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(Computing the standard deviation for a portfolo 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 FirmA and Firm B: a. If Mary invests half her money in each of the two common stocks, what is 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 ha

(Computing the standard deviation for a portfolo 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 FirmA and Firm B: a. If Mary invests half her money in each of the two common stocks, what is 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 ha

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Viden, a financial advisor for high-net-worth individuals, is examining the portfolio of a client who has requested to reduce the risk of his portfolio which is currently populated only with stocks. The client needs an investment with regular cash flows to finance his daughter’s 4-year university education, as well as a short term fund to meet unexpected requirements in cash. (a) Determine what are the best asset classes to meet his needs, and discuss the reasons for your choice. (b) What will happen to the systematic risk of the client’s portfolio after the change?
Rachel is a financial investor who actively buys and sells in the securities market. Now she has a portfolio of all blue chips, including: $13,500 of Share A, $7,600 of Share B, $14,700 of Share C, and $5,500 of Share D. (a) Compute the weights of the assets in Rachel’s portfolio?(b) Find the geometric average return (c)Find the risk free rate of return (d)Find the expected rate of return of the portfolio
Rachel is a financial investor who actively buys and sells in the securities market. Now she has a portfolio of all blue chips, including: $13 500 of Share A, $7600 of Share B, $14 700 of Share C, and $5 500 of Share D. Required:a) Compute the weights of the assets in Rachel’s portfolio?b) If Rachel’s portfolio has provided her with returns of 9.7%, 12.4%, - 5.5% and 17.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period. c) Assume that expected return of the stock A in Rachel’s portfolio is 13.6% this year. The risk premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflation rate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model (CAPM).d) Following is forecast for economic situation and Rachel’s portfolio returns next year, calculate the expected return, variance and standard deviation of the portfolio.State of economyMild Recession…
Suppose Megan is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. As the risk of Megan's portfolio increases, the average annual return on her portfolio .Suppose Megan currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the average annual return on her portfolio from 3% to 7%. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and place the proceeds in a savings accountAccept more riskSell some of her bonds and use the proceeds to purchase stocksSell some of her stocks and use the proceeds to purchase bondsThe table uses the standard deviation of the portfolio's return as a measure of risk. A normal random variable, such as a…
Rachel is a financial investor who actively buys and sells in the securities market. Now she has a portfolio of all blue chips, including: $13,500 of Share A, $7,600 of Share B, $14,700 of Share C, and $5,500 of Share D. Required: a) Compute the weights of the assets in Rachel’s portfolio? b) If Rachel’s portfolio has provided her with returns of 9.7%, 12.4%, -5.5% and 17.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period. c) Assume that expected return of the stock A in Rachel’s portfolio is 13.6% this year. The risk premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflation rate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model (CAPM). d) Following is forecast for economic situation and Rachel’s portfolio returns next year, calculate the expected return, variance and standard deviation of the portfolio.State of economy Probability Rate of…
Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. There is a relationship between the risk of Caroline's portfolio and its average annual return.Suppose Caroline currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase bondsSell some of her bonds and use the proceeds to purchase stocksPlace the entirety of her portfolio in bondsAccept a lower average annual rate of returnThe table uses the standard deviation of the…
Rachel is a financial investor who actively buys and sells in the securities market. Now she has a portfolio of all blue chips, including: $13,500 of Share A, $7,600 of Share B, $14,700 of Share C, and $5,500 of Share D. a) Compute the weights of the assets in Rachel’s portfolio? b) If Rachel’s portfolio has provided her with returns of 9.7%, 12.4%, -5.5% and 17.2% over the past four years, respectively. Calculate the geometric average return of the portfolio for this period. c) Assume that expected return of the stock A in Rachel’s portfolio is 13.6% this year. The risk premium on the stocks of the same industry are 4.8%, betas of these stocks is 1.5 and the inflation rate was 2.7%. Calculate the risk-free rate of return using Capital Market Asset Pricing Model (CAPM). d) Following is forecast for economic situation and Rachel’s portfolio returns next year, calculate the expected return, variance and standard deviation of the portfolio. State of economy Probability…
Christy is considering investing in the common stock of One Liberty and Heico. The following data are available for these two securities: One Liberty Heico Expected return 0.12 0.16 Standard deviation of returns 0.08 0.20 If she invests 30% of her funds in Heico and 70% in One Liberty, and if the correlation of returns between these securities is +0.65, what is the portfolio's expected return and standard deviation?
During an interview with her investment adviser, a retired investor made the following two statements:a. “I have been very pleased with the returns I’ve earned on Petrie stock over the past two years and I am certain that it will be a superior performer in the future.”b. “I am pleased with the returns from the Petrie stock because I have specific uses for that money. For that reason, I certainly want my retirement fund to continue owning the Petrie stock.”Identify which principle of behavioral finance is most consistent with each of the investor’s two statements.
Rachel is a financial investor who actively buys and sells in the securities market. Now she has aportfolio of all blue chips, including: $13,500 of Share A, $7,600 of Share B, $14,700 of Share C, and$5,500 of Share D.Required:a) Compute the weights of the assets in Rachel’s portfolio? b) If Rachel’s portfolio has provided her with returns of 9.7%, 12.4%, -5.5% and 17.2% over the pastfour years, respectively. Calculate the geometric average return of the portfolio for this period. c) Following is forecast for economic situation and Rachel’s portfolio returns next year, calculate theexpected return, variance and standard deviation of the portfolio. State of economy Probability Rate of returnsMild Recession 0.35 - 5%Growth 0.45 15%Strong Growth 0.20 30%

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