Concept explainers
a.
Determine: Expected return and standard deviation of the portfolio invested.
a.
Explanation of Solution
Given information:
It is given that expected return of A is 0.07, expected return of B is 0.10, expected return of C is 0.20, standard deviation of A is 0.3311, standard deviation of B is 0.5385, standard deviation of C is 0.8944, correlation coefficient between A and B is 0.35, portfolio invested in A is 30% and in B is 70%.
Formula to calculate expected return is as follows:
Substituting Equation with 0.10 for the return of A and 30% for the portfolio invested in A, 0.16 for the return of B and 70% for the portfolio invested in B to calculate expected return.
Hence, the expected return from portfolio investment of 30% in stock A and 70% in stock B is 14.2%.
Formula to calculate standard deviation of the portfolio invested is as follows:
Substituting Equation with 0.30 for Wa, 0.20 for σa, 0.70 for Wb, 0.40 for σb to calculate standard deviation of the portfolio invested.
Hence, standard deviation of the portfolio invested is 88.98%.
b.
Determine: Expected return and standard deviation of the portfolio invested.
b.
Explanation of Solution
Given information:
It is given that expected return of A is 0.10, expected return of B is 0.16, standard deviation of A is 0.20, standard deviation of B is 0.40, correlation coefficient between A and B is 0.35, portfolio invested in A is 30% and in B is 70%.
Formula to calculate expected return is as follows:
Substituting Equation with 0.10 for the return of A and 30% for the portfolio invested in A, 0.16 for the return of B and 70% for the portfolio invested in B to calculate expected return.
Hence, the expected return from portfolio investment of 30% in stock A and 70% in stock B is 14.2%.
Formula to calculate standard deviation of the portfolio invested is as follows:
Substituting Equation with 0.30 for Wa, 0.20 for σa, 0.70 for Wb, 0.40 for σb to calculate standard deviation of the portfolio invested.
Hence, standard deviation of the portfolio invested is 88.98%.
c.
Determine: Expected return and standard deviation of the portfolio invested.
c.
Explanation of Solution
Given information:
It is given that expected return of A is 0.10, expected return of B is 0.16, standard deviation of A is 0.20, standard deviation of B is 0.40, correlation coefficient between A and B is 0.35, portfolio invested in A is 30% and in B is 70%.
Formula to calculate expected return is as follows:
Substituting Equation with 0.10 for the return of A and 30% for the portfolio invested in A, 0.16 for the return of B and 70% for the portfolio invested in B to calculate expected return.
Hence, the expected return from portfolio investment of 30% in stock A and 70% in stock B is 14.2%.
Formula to calculate standard deviation of the portfolio invested is as follows:
Substituting Equation with 0.30 for Wa, 0.20 for σa, 0.70 for Wb, 0.40 for σb to calculate standard deviation of the portfolio invested.
Hence, standard deviation of the portfolio invested is 88.98%.
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Chapter 25 Solutions
EBK FINANCIAL MANAGEMENT: THEORY & PRAC
- a. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance betweenthe returns of A and B is 0.006. The correlation of returns between A and B is:arrow_forwardSuppose the index model for stocks A and B is estimated with the following results:rA = 2% + 0.8RM + eA, rB = 2% + 1.2RM + eB , σM = 20%, and RM = rM − rf . The regressionR2 of stocks A and B is 0.40 and 0.30, respectively. Answer the following questions. (a) What is the variance of each stock? (b) What is the firm-specific risk of each stock? (c) What is the covariance between the two stocks?arrow_forwardthe variance of stock A is .004, the variance of the market .007 and the covariance between the two is .0026. what is the correlation coefficient?arrow_forward
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- Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning