EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 8, Problem 21P
Summary Introduction
To determine: Standard deviation of the portfolio.
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The beta of a portfolio is:
A. A measure of the correlation of betas of the securities in the portfolio.
B. Always greater than one.
C. The market value weighted average beta of the securities in the portfolio.
D. The geometric average of the beta of the securities in the portfolio.
What is the formula for the Sharpe Ratio for a two-asset portfolio of stocks and bonds with equal expected returns, i.e., E(RS)= E(RB), and a perfect negative correlation. Can use XS, sS for the portfolio weight and standard deviation of stocks, and XB, sB for the portfolio weight and standard deviation of bonds.
Assume that two securities, A and B, constitute the market portfolio, their proportions and variances are 0.39, 160, and 0.61, 340, respectively. The covariance of the two securities is 190. Estimate the systematic risk (beta) of the two securities. Note that the covariance of security-i with the market portfolio is simply the weighted average of the covariances of security-i with all the securities included in the market portfolio – the lesson you learned in the context of the bordered covariance matrix.
Answer step by step.Do all part.Answer must be correct.
Chapter 8 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 8 - Prob. 1QTDCh. 8 - Prob. 2QTDCh. 8 - Prob. 3QTDCh. 8 - Prob. 4QTDCh. 8 - Prob. 5QTDCh. 8 - Prob. 6QTDCh. 8 - Prob. 7QTDCh. 8 - Prob. 8QTDCh. 8 - Prob. 9QTDCh. 8 - Prob. 10QTD
Ch. 8 - Prob. 11QTDCh. 8 - Prob. 12QTDCh. 8 - Prob. 13QTDCh. 8 - Prob. 14QTDCh. 8 - Prob. 15QTDCh. 8 - Prob. 16QTDCh. 8 - Prob. 17QTDCh. 8 - Prob. 18QTDCh. 8 - Prob. 19QTDCh. 8 - Prob. 20QTDCh. 8 - Prob. 21QTDCh. 8 - Prob. 1PCh. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Prob. 7PCh. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - Prob. 12PCh. 8 - Prob. 13PCh. 8 - Prob. 14PCh. 8 - Prob. 15PCh. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 8 - Prob. 18PCh. 8 - Prob. 19PCh. 8 - Prob. 20PCh. 8 - Prob. 21PCh. 8 - Prob. 22PCh. 8 - Prob. 23PCh. 8 - Prob. 24PCh. 8 - Prob. 25PCh. 8 - Prob. 26PCh. 8 - Prob. 27PCh. 8 - Prob. 28P
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- The covariance between stocks A and B is 0.0014, the standard deviation of stock A is 0.032, and the standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why?arrow_forwardConsider two risky securities A and B, as well as a risk-free bond. Their average returns and standard deviations are presented in the table below. The correlation between the Securities A and B is 0.3. Average Return Standard Deviation Security A 8% 12% Security B 13% 20% Risk-free bond 5% 0% a) What is the average return and standard deviation of an equally-weighted portfolio in A and B?arrow_forwardQuestion #1. ‘The expected return from a portfolio of securities is the average of the expected returns of the individual securities that make up the portfolio, weighted by the value of the securities in the portfolio.’ ‘The expected standard deviation of returns from a portfolio of securities is the average of the standard deviations of returns of the individual securities that make up the portfolio, weighted by the value of the securities in the portfolio.’ Are these statements correct? What can be said about the portfolio that is represented by any point along the efficient frontier of risky investment portfolios? and What is meant by ‘two-fund separation’? ‘The capital asset pricing model tells us that a security with a beta of 2 will be expected to yield a return twice that of a security whose beta is 1.’ Is this statement true?arrow_forward
- Consider two securities, A and B, whose standard deviations of returns and betas are given below: Security A Security B Standard deviation 15% 25% Beta 1.30 0.75 Which security will have the higher risk premium? Security A or B?arrow_forwardTwo securities have the following characteristics: Security A Security B Expected return 32% 17% Standard deviation 28% 34% Proportion (Weight) 55% 45% Beta 1.2 0.25 Correlation Coefficient 0.85 Determine the risk (standard deviation) of the portfolio with Securities A and B.arrow_forwardShow detailed steps to solve the following question. Consider a portfolio comprised of three securities in the following proportions and with the indicated security beta. a.) What is the portfolios beta? b.) Wht is the portfolios expected return?arrow_forward
- 1) The standard deviation of a portfolio of risky securities is A) the square root of the weighted sum of the securities' variances. B) the square root of the sum of the securities' variances. C) the square root of the weighted sum of the securities' variances and covariances. D) the square root of the sum of the securities' covariances Provide accurate answer and justify it.arrow_forwardWhich of the following measures the total risk of a portfolio? A. Standard Deviation B. Correlation Coefficient C. Beta D. Alphaarrow_forwardFrom 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 0.65arrow_forward
- Compute the portfolio risk if stock A and Stock B are combined in a portfolio in the ratio 6:4 respectively.arrow_forwardA portfolio manager creates the following portfolio: Security Security Weight Expected Standard Deviation 1 0.25 0.55 2 0.75 0.36 If the correlation of returns between the two securities is -0.10, the standard deviation of the portfolio is closest to 44%. 97%. 05%. 12%.arrow_forwardFrom 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 0.65arrow_forward
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