16. There are two stocks with the following return and risk values. The correlation between A and B is 0.2. al Expected Standard Return(%) Deviation(%) Stock A 5.5 10 B 7.5 17 What is the standard deviation of the minimum variance portfolio(MVP) that is a) formed by combining assets A and B? (That is, what are the weights of stock A and stock B in MVP?) b) What is the expected return of the portfolio P that is formed by investing 50% on the MVP and 50% on a stock that has an expected return of 10%? c) Assume that the only assets available to investors are the risk free asset and the portfolio P. The risk free rate is 2%. Assume also that there is $100 to be invested. What is the expected return of a NEW portfolio that is formed by combining risk free rate with a weight of -0.5 and portfolio P with a weight of 1.5? What does a negative weight mean? Explain with one sentence
16. There are two stocks with the following return and risk values. The correlation between A and B is 0.2. al Expected Standard Return(%) Deviation(%) Stock A 5.5 10 B 7.5 17 What is the standard deviation of the minimum variance portfolio(MVP) that is a) formed by combining assets A and B? (That is, what are the weights of stock A and stock B in MVP?) b) What is the expected return of the portfolio P that is formed by investing 50% on the MVP and 50% on a stock that has an expected return of 10%? c) Assume that the only assets available to investors are the risk free asset and the portfolio P. The risk free rate is 2%. Assume also that there is $100 to be invested. What is the expected return of a NEW portfolio that is formed by combining risk free rate with a weight of -0.5 and portfolio P with a weight of 1.5? What does a negative weight mean? Explain with one sentence
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 6P
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:16.
There are two stocks with the following return and risk values. The correlation between A and B is 0.2.
al
Expected Standard
Return(%) Deviation(%)
Stock
A
5.5
10
B
7.5
17
What is the standard deviation of the minimum variance portfolio(MVP) that is
a)
formed by combining assets A and B? (That is, what are the weights of stock A and stock B in
MVP?)
b)
What is the expected return of the portfolio P that is formed by investing 50% on the
MVP and 50% on a stock that has an expected return of 10%?
c) Assume that the only assets available to investors are the risk free asset and the
portfolio P. The risk free rate is 2%. Assume also that there is $100 to be invested. What is the
expected return of a NEW portfolio that is formed by combining risk free rate with a weight of -0.5
and portfolio P with a weight of 1.5? What does a negative weight mean? Explain with one
sentence
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