INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 7, Problem 10CP
Summary Introduction
Concept introduction: The portfolio is a proportion of each security held of its total market value. A good portfolio should have a beta of +1 to -1.
To discuss:The portfolio that one might recommend.
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You are considering two stocks and have determined the following information (refer to image):
a. Which of the two stocks has the higher expected return?b. Which stock is riskier?c. Given your answers to the two previous questions, what stock is preferred?
As an active fund manager, you have obtained information on three individual stocks, the market index, and T-bills as follows:
Asset
Expected Return (%)
Total
Standard Deviation (%)
Beta
Stock 1
20.0
80.00
1.8
Stock 2
16.0
60.00
1.4
Stock 3
6.0
50.00
0.8
Market Index
10.0
40.00
1.0
T-bills
4.0
0.00
0.0
You decide to use the above information to form an optimal active portfolio, consisting of the three individual stocks. Determine the corresponding weights for the three stocks in the optimal active portfolio. Show your work.
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
Chapter 7 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 7 - Prob. 1PSCh. 7 - Prob. 2PSCh. 7 - Prob. 3PSCh. 7 - Prob. 4PSCh. 7 - Prob. 5PSCh. 7 - Prob. 6PSCh. 7 - Prob. 7PSCh. 7 - Prob. 8PSCh. 7 - Prob. 9PSCh. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Prob. 12PSCh. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - Prob. 15PSCh. 7 - Prob. 16PSCh. 7 - Prob. 17PSCh. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - Prob. 21PSCh. 7 - Prob. 22PSCh. 7 - Prob. 23PSCh. 7 - Prob. 1CPCh. 7 - Prob. 2CPCh. 7 - Prob. 3CPCh. 7 - Prob. 4CPCh. 7 - Prob. 5CPCh. 7 - Prob. 6CPCh. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - Prob. 9CPCh. 7 - Prob. 10CPCh. 7 - Prob. 11CPCh. 7 - Prob. 12CPCh. 7 - Prob. 13CP
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