Concept explainers
a)
To discuss:
Actual return of portfolio.
Introduction:
Portfolio return: In financial context; portfolio return is seen as percentage that represents the profit on a portfolio of investments.
b)
To discuss:
Average returns
Introduction:
Return: In financial context, return is seen as percentage that represents the profit in an investment.
Portfolio refers to a set of financial investments such as debentures, stocks, bonds and mutual funds owned by the investor.
c)
To discuss:
Standard deviation.
Introduction:
Risk: The risk can be defined as the uncertainty attached to an event such as investment where there is some amount of risk associated to it as there can be either gain or loss.
The standard deviation measures the volatility of the stock. It measures in absolute terms the dispersion of asset risk around its mean.
d)
To discuss:
Correlation of assets.
e)
To discuss:
Benefits of diversification by creation of portfolio.
Introduction:
Portfolio refers to a set of financial investments such as debentures, stocks, bonds and mutual funds owned by the investor.
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EBK PRINCIPLES OF MANAGERIAL FINANCE
- 6-13) You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, stocks A and B, have the following historical returns: Year rA rB 2009 -20.00% -5.00% 2010 42.00 15.00 2011 20.00 -13.00 2012 -8.00 50.00 2013 25.00 12.00 a. Calculate the average rate of return for each stock during the 5-year period. b. Suppose you had held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each year? What would have been the average return on the portfolio during this period? c. Calculate the standard deviation of returns for each stock and for the portfolio. d. If you are a risk-averse investor, then, assuming these are your only choices, would you prefer to hold Stock A, Stock B, or the portfolio? Why?arrow_forwardQ2: A private investment club has $200,000 earmarked for investment in stocks. To arrive at an acceptable overall level of risk, the stocks that management is considering have been classified into three categories: high risk, medium risk, and low risk. Management estimates that high-risk stocks will have a rate of return of 15%/year; medium-risk stocks, 10%/year; and low-risk stocks, 6%/year. The members have decided that the investment in low-risk stocks should be equal to the sum of the investments in the stocks of the other two categories. Determine how much the club should invest in each type of stock if the investment goal is to have a return of $20,000/year on the total investment. (Assume that all the money available for investment is investedarrow_forward9. Portfolio beta and weights Brandon is an analyst at a wealth management firm. One of his clients holds a $5,000 portfolio that consists of four stocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in the following table: Stock Investment Allocation Beta Standard Deviation Atteric Inc. (AI) 35% 0.750 38.00% Arthur Trust Inc. (AT) 20% 1.400 42.00% Li Corp. (LC) 15% 1.300 45.00% Transfer Fuels Co. (TF) 30% 0.500 49.00% Brandon calculated the portfolio’s beta as 0.888 and the portfolio’s required return as 12.6600%. Brandon thinks it will be a good idea to reallocate the funds in his client’s portfolio. He recommends replacing Atteric Inc.’s shares with the same amount in additional shares of Transfer Fuels Co. The risk-free rate is 6%, and the market risk premium is 7.50%. A. According to Brandon’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s…arrow_forward
- Portfolio beta and weights Rafael is an analyst at a wealth management firm. One of his clients holds a $10,000 portfolio that consists of four stocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in the following table: Stock Investment Allocation Beta Standard Deviation Atteric Inc. (AI) 35% 0.900 23.00% Arthur Trust Inc. (AT) 20% 1.400 27.00% Li Corp. (LC) 15% 1.100 30.00% Transfer Fuels Co. (TF) 30% 0.300 34.00% Rafael calculated the portfolio’s beta as 0.850 and the portfolio’s required return as 8.6750%. Rafael thinks it will be a good idea to reallocate the funds in his client’s portfolio. He recommends replacing Atteric Inc.’s shares with the same amount in additional shares of Transfer Fuels Co. The risk-free rate is 4%, and the market risk premium is 5.50%. According to Rafael’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required…arrow_forwardStock A and stock C have the following historical returns: Year Stock A Return Beta Stock C Return Beta 2017 (18%) 0.80 (14.50) 0.90 2018 33% 1.5 21.80% 2.0 2019 15% 2.0 30.50% 1.0 2020 (5.50%) -0.90 (7.60%) -0.50 2021 27% 1.0 26.30% 1.5 a. Calculate the average rate of return for each stock during the period 2017-2021 b. Assume you want to create a portfolio consisting of 60 percent of stock A and 40 percent of stock C, b.1. What would be your realized rate of return on the portfolio have been each year? b.2. What would be your average rate of return on the portfolio have been during this period? c. Calculate the standard deviation of the portfolio return d. Calculate the coefficient of variation for each stock and for the portfolio. e. Assuming you are a risk-averse investor, would you prefer to hold Stock A, Stock B, or the portfolio? Why?arrow_forwardStandard Deviation for portfolio of two risky investments: Mary Guilott recently graduated from college and is evaluating an investment in two companies common stock. She has collected the following information about the common stock of firm A and firm B: Firm A's common stock: 0.15 (expected return), 0.11(standard Deviation) Firm B's common stock: 0.11 (expected return), 0.06 (standard Deviation) Correlation Coefficient: 0.5 If mary decides to invest 10% of her money in Firm A's common stock and 90% in Firm B's common stock, what is the expected rate of return and the standard deviation of the portfolioarrow_forward
- Using the data in the following table, Year 2010 2011 2012 2013 2014 2015 Stock A -10% 20% 5% -5% 2% 9% Stock B 21% 7% 30% -3% -8% 25% consider a portfolio that maintains a 50% weight on stock A and a 50% weight on stock B. What is the return each year of this portfolio? Based on your results from partarrow_forwardPortfolio beta and weights Brandon is an analyst at a wealth management firm. One of his clients holds a $5,000 portfolio that consists of four stocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in the following table: Stock Investment Allocation Beta Standard Deviation Atteric Inc. (AI) 35% 0.750 38.00% Arthur Trust Inc. (AT) 20% 1.500 42.00% Li Corp. (LC) 15% 1.100 45.00% Baque Co. (BC) 30% 0.300 49.00% Brandon calculated the portfolio’s beta as 0.818 and the portfolio’s required return as 8.4990%. Brandon thinks it will be a good idea to reallocate the funds in his client’s portfolio. He recommends replacing Atteric Inc.’s shares with the same amount in additional shares of Baque Co. The risk-free rate is 4%, and the market risk premium is 5.50%. According to Brandon’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change?…arrow_forward. Portfolio beta and weights Brandon is an analyst at a wealth management firm. One of his clients holds a $5,000 portfolio that consists of four stocks. The investment allocation in the portfolio along with the contribution of risk from each stock is given in the following table: Stock Investment Allocation Beta Standard Deviation Atteric Inc. (AI) 35% 0.750 38.00% Arthur Trust Inc. (AT) 20% 1.500 42.00% Li Corp. (LC) 15% 1.100 45.00% Baque Co. (BC) 30% 0.300 49.00% Brandon calculated the portfolio’s beta as 0.818 and the portfolio’s required return as 8.4990%. Brandon thinks it will be a good idea to reallocate the funds in his client’s portfolio. He recommends replacing Atteric Inc.’s shares with the same amount in additional shares of Baque Co. The risk-free rate is 4%, and the market risk premium is 5.50%. Suppose instead of replacing Atteric Inc.’s stock with Baque Co.’s stock, Brandon considers replacing Atteric Inc.’s stock with the equal…arrow_forward
- q1: tate your portfolio objectives. Then construct a 5-stock portfolio that you feel is consistent with your objectives. (Use companies that have been public for at least five years.) To access the data for your 5 companies, you can use yahoo finance (finance.yahoo.com)Obtain annual adjusted closing price data for each of the past five years. a. Calculate the historical return for each stock for each year. b. Using your findings in part a , calculate the historical portfolio return for each of the five years. c. Use your findings in part b to calculate the average portfolio return over the five years. d. Use your findings in parts b and c to find the standard deviation of the portfolio’s returns over the five-year period. e. Use the historical average return from part c and the standard deviation from part d to evaluate the portfolio’s return and risk in light of your stated portfolio objectives.arrow_forwardBuilding a Financial Portfolio. Blair & Rosen, Inc. (B&R) is a brokerage firm that specializes in investment portfolios designed to meet the specific risk tolerances of its clients. A client who contacted B&R this past week has a maximum of $50,000 to invest. B&R’s investment advisor decides to recommend a portfolio consisting of two investment funds: an Internet fund and a Blue Chip fund. The Internet fund has a projected annual return of 12%, and the Blue Chip fund has a projected annual return of 9%. The investment advisor requires that at most $35,000 of the client’s funds should be invested in the Internet fund. B&R services include a risk rating for each investment alternative. The Internet fund, which is the more risky of the two investment alternatives, has a risk rating of 6 per $1,000 invested. The Blue Chip fund has a risk rating of 4 per $1,000 invested. For example, if $10,000 is invested in each of the two investment funds, B&R’s risk rating for…arrow_forwardInvestment Selection | L04] Given that Hertz was down by 88 percent in the first half of 2020, why did some investors hold the stock? Why didn't they sell out before the price declined so sharply? Show work on excelarrow_forward
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