Answered: Evaluate this statement: For any…

Evaluate this statement: For any two-stock portfolio, a correlation coefficient of -1.0 guarantees a portfolio risk of zero.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 8MC

See similar textbooks

Related questions

Q: Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found…

A: As per the security market line following is the Rate of return for stock A and stock B…

Q: An investment portfolio consists of two securities, X and Y. The weight of X is 30%. Asset X's…

A: a. expected return of portfolio=wx×rx+wy×ry=0.3×15%+0.7×23%=20.6% answer: expected return = 20.6%

Q: c) Assume that using the Security Market Line (SML) the required rate of return (Ra) on stock A is…

A: Since you have asked multiple question, we will solve the first question for you. If you want any…

Q: Assuming that the CAPM approach is appropriate, compute the required rate of return for each of the…

A: As per CAPM, Expected Return = Risk free Rate + (beta * market risk premium) Where market risk…

Q: You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a…

A: Introduction: Beta less than 1 state that the security price will move with the market and a beta…

Q: Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found…

A: Required rate of return on stock A is RARequired rate of return on stock B is RBRisk free rate is…

Q: Consider a portfolio consisting of the following three stocks: E. The volatility of the market…

A: This is a complex question with several subparts, so according to Bartleby guidelines, we will…

Q: Could a more optimal portfolio, that is, one containing some other combination of stocks that would…

A: The question is based on the concept of optimal portfolio, an optimal portfolio is a theoretical…

Q: Consider the following information for stocks A, B, and C. The returns on the three stocks are…

A: Hey, since there are multiple subpart questions posted, we will answer the first three questions. If…

Q: Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is…

A: Capital Asset Pricing Model (CAPM): CAPM is the method of calculating the expected return on…

Q: How would i do this question?

A: The most general form of expression for the portfolio variance is as shown on the white board. The…

Q: What is the systematic risk for a portfolio with two-thirds of the funds invested in X and one-third…

A: The systematic risk of a portfolio is measured by the beta of the portfolio

Q: Let r be the expected return of stock i, rRE represent the risk-free rate, b represent the Beta of a…

A: Capital Asset Pricing Model: The CAPM explains the relationship between expected return and…

Q: Stock A has a standard deviation of 3.5% while stock B has a standard deviation of 4.6%. If both…

A: Standard deviation is a variation in the mean value of given data. Standard deviation is a…

Q: Which of the following statements about CAPM is true? a. The expected return of a zero-beta security…

A: CAPM is the capital asset pricing model. As per CAPM expected return as follows: Expected return =…

Q: Suppose that the risk-free rate ry = 0.03, the expected market return µM = 0.11, and the market…

A: Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…

Q: If you added more stocks at random to the portfolio,critically evaluate which of the following…

A: Portfolio: A portfolio includes of numerous securities or financial instruments accessible in the…

Q: Use the following table to answer the questions a-c below. Standard deviation of risky portfolio 3.5…

A: Note: We’ll answer the first question, including sub-parts since the exact one wasn’t specified.…

Q: What are the the key concepts (e.g., the standard deviation of the portfolio is less than the…

A: The question is based on the explanation of key concept behind creating a portfolio with different…

Q: Assume the market portfolio's and risk-free rate's projected returns are 13% and 3%, respectively.…

A: There are various portfolio performance measures and one such measure is Treynors' ratio. This ratio…

Q: Assume that using the Security Market Line the required rate of return (RA) on stock A is found to…

A: As per the above consideration The ratio of expected return on A and expected return on B is

Q: A portfolio management organization analyzes 60 stocks and constructs a mean-variance efficient…

A: The question is based on the concept of two popular assets allocation model, Index Model and…

Q: A portfolio manager creates the following portfolio: Security Security Weight Expected Standard…

A: Standard deviation of portfolio is dependent on the weight of each security in the in the portfolio…

Q: As the number of securities in a portfolio is increased, what happens to the average portfolio…

A: Standard Deviation: It is a statistical measure of dispersion and measures the dispersion in the…

Q: You have the following data on three stocks: Stock Standard Deviation Beta A. 0.15 0.79 0.25 0.61 C…

Q: Assume that you have a portfolio of two stocks, X and Y. If the risk of stock X is 1.2 and the risk…

A: Given, the risk of stock X is 1.2 and the risk of stock Y is 4

Q: Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5.…

A: Required rate of return = risk free rate + beta * (market return - risk free rate)

Q: Consider an investment portfolio that consists of three different stocks, with the amount invested…

A: Given The risk free rate is 2.5% The market risk premium is 6%

Q: Suppose the expected return for the market portfolio and risk-free rate are 13 percent and 3 percent…

A: Treynor ratio = (Expected return - Risk free rate) / BetaTreynor ratio of the market = (Expected…

Q: You have a portfolio of investment which consists of Stock A with a return of A% and Stock B with a…

A: According to the Law of Sum of variances, variances of two stock can be added but that of standard…

Q: Using the data in the following table, calculate the volatility (standard deviation) of a portfolio…

A: Given: Weight 75% 25% Year Stock A Stock B 2010 -10% 16% 2011 5% 20% 2012 2% 26% 2013…

Q: what would be the preferred correlation coefficient between the two stocks?

A: Correlation of two variables means that the change in one variable results in a corresponding…

Q: A stock's contribution to the market risk of a well-diversified portfolio is called risk. It can be…

A: Total risk can be measured as systematic risk and unsystematic risk.

Q: You have a portfolio P that consists of 50% Stock X and 50% Stock Y. Stock X has a beta of 0.7 and…

A: Given, The portfolio has stock X and stock Y. The beta of stock X is 0.7 and the beta of stock Y…

Q: If a portfolio of the two assets has a beta of .99, what are the portfolio weights? (Do not round…

A: Hi. Since there is no information given regarding the beta of stock, we are randomly assuming the…

Q: A stock with a beta of zero would be expected to have a rate of return equal to Group of answer…

A: Solution:- Discussion if A stock with a beta of zero would be expected to have a rate of return…

Q: e Target's stock has an expected return of 22% and a volatility of 40%, Hershey's stock has an…

A: Return on portfolio and volatility of the portfolio depends on weights of different components of…

Q: In a portfolio with three different stocks, which of the following could not be true? Select one: a.…

A: Portfolio beta is the average beta of each stock in the portfolio basis weight of portfolio.

Q: Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found…

A: Calculation of ratio of beta of A to beta of B: Answer: The ratio of beta A to beta B is 0.4286

Q: Assume that the Capital Asset Pricing Model holds. The market portfolio has an expected return of…

A: IF Capital Asset Pricing Model (CAPM) hold good, Expected Return on Stock = Risk-Free rate + (…

Q: Assume that you have a portfolio of two stocks, X and Y. If the risk of stock X is 1.2 and the risk…

A: 4) For a rational investor, if risk is higher investor demands greater return.

Q: Consider two stocks, X and Y…

A: Let the weight in X = w and weight in Y = 1-w Standard deviation of X (Sx) = 18% Standard deviation…

Q: Suppose Target's stock has an expected return of 20% and a volatility of 40%, Hershey's stock has an…

A: T's expected return = 20% T's Volatility = 40% H's expected return = 10% H's Volatility = 21% New…

Q: The data on the expected return of 2 stocks (M and C) along with the economic conditions and their…

A: Expected return of a stock is the minimum rate of return that an investor expects from the security…

Concept explainers

Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.

Question

Evaluate this statement: For any two-stock portfolio, a correlation coefficient of -1.0 guarantees a portfolio risk of zero.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

Calculate the correlation coefficient between Blandy and the market. Use this and the previously calculated (or given) standard deviations of Blandy and the market to estimate Blandy’s beta. Does Blandy contribute more or less risk to a well-diversified portfolio than does the average stock? Use the SML to estimate Blandy’s required return.
What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.
You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. What are the betas of Stocks X and Y? What are the required rates of return on Stocks X and Y? What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?
Given: Calculate the expected returns and expected standard deviations of a two-stock portfolio having a correlation coefficient of 0.70 under the following conditions a. w1 = 1.00 b. w1 = 0.75 c. w1 = 0.50 d. w1 = 0.25 e. w1 = 0.05 Plot the results on a return-risk graph. Without calculations, draw in what the curve would look like first if the correlation coefficient had been 0.00 and then if it had been −0.70.
From the following information, calculate covariance between stocks A and B and expected return and risk of a portfolio in which A and B are equally weighted.Which stock would be recommend if investment in individual stock is to be made? Justify answer using numerical calculations. Stock A Stock B Expected return 24% 35% Standard deviation 12% 18% Coefficient of correlation 0.65 0.65
From the following information, calculate covariance between stocks A and B and expected return and risk of a portfolio in which A and B are equally weighted.Which stock would be best recommend if investment in individual stock is to be made? Justify the answer using numerical calculations. Stock A Stock B Expected return 24% 35% Standard deviation 12% 18% Coefficient of correlation 0.65
Suppose the expected return for the market portfolio and risk-free rate are 13 percent and 3 percent respectively. Stocks A, B, and C have Treynor measures of 0.24, 0.16, and 0.11, respectively. Based on this information, an investor should ______?
Find risk free rate and expected return of market portfolio based on the following information - Company A stock - expected return = 14%, beta = 1.2 Company B stock - expected return = 20%, beta = 2.4 Alphas of both stocks are 0, and there is no abnormal return. Find risk free rate and expected return of market portfolio. Use two equations.
If a portfolio of the two assets has a beta of .99, what are the portfolio weights? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Weight of stock Risk-free weight
Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A(A) to beta of B(B).