Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
Chapter 8, Problem 8.15P
Learning Goal 4
P8- 15 Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The expected returns and standard deviations calculated for each of the assets are shown in the following table.
| Asset | Expected return,
|
Standard deviation, σ |
| V | 8% | 5% |
| W | 13 | 10 |
- a. If the
returns of assets V and Ware perfectly pos1t1vely correlated (correlation coefficient = + 1), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations. - b. If the returns of assets V and W are uncorrelated (correlation coefficient = 0), describe the approximate range of (1) expected return and (2) risk associated with all possible portfolio combinations.
- c. If the returns of assets V and W are perfectly negatively correlated (correlation coefficient = –1 ), describe the range of (1) expected return and (2) risk associated with all possible portfolio combinations.
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Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The expected return and standard deviations calculated for each of the assets are shown in the following table:
Asset
Expected return, r
Standard deviation), σ
V
9%
14
W
11%
20%
If the returns of assets V and W are perfectly positively correlated (correlation
coefficient=+1), describe the range of (1) expected return and (2) standard deviation associated with all possible portfolio combinations.
b. If the returns of assets V and W are uncorrelated (correlation coefficient=0),describe the approximate range of (1) expected return and (2) standard deviation associated with all possible portfolio combinations.
c. If the returns of assets V and W are perfectly negatively correlated (correlation
coefficient=−1),…
QUESTION 5
Exhibit 6.15
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Asset (A)
Asset (B)
E(RA) = 14%
E(RB) = 16%
(σA) = 13%
(σB) = 18%
WA = 0.4
WB = 0.6
COVA,B = 0.0024
Refer to Exhibit 6.15. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation ( σ i ), covariance (COVi,j), and asset weight (Wi) are as shown above?
a.
15.2%
b.
13.8%
c.
16.8%
d.
14.6%
e.
15.0%
The possible rates of return of two assets, A and B, under different economic conditions are given below:
Economic Situation Probability Return of Asset A Return of Asset B Recession 0.2 10% 6%
Stable 0.5 14% 15%
Growth 0.3 20% 11%
An investor places 50% of his funds in Asset A and 50% in Asset B. [Note: you may use correlation between A and B as 0.2401] Required:
(i)Calculate the risk and expected return for each asset.
(ii)Calculate the risk and expected return of the investor’s 2-assets portfolio.
(iii) What do you understand by total risk?
Chapter 8 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 8.1 - What is risk in the context of financial decision...Ch. 8.1 - Prob. 8.2RQCh. 8.1 - Compare the following risk preferences: (a) risk...Ch. 8.2 - Explain how the range is used in scenario...Ch. 8.2 - Prob. 8.5RQCh. 8.2 - Prob. 8.6RQCh. 8.2 - What does the coefficient of variation reveal...Ch. 8.3 - What is an efficient portfolio? How can the return...Ch. 8.3 - Prob. 8.9RQCh. 8.3 - How does international diversification enhance...
Ch. 8.4 - Prob. 8.11RQCh. 8.4 - Prob. 8.12RQCh. 8.4 - Prob. 8.13RQCh. 8.4 - What impact would the following changes have on...Ch. 8 - Prob. 1ORCh. 8 - Prob. 8.1STPCh. 8 - Prob. 8.2STPCh. 8 - Prob. 8.1WUECh. 8 - Prob. 8.2WUECh. 8 - Prob. 8.3WUECh. 8 - Prob. 8.4WUECh. 8 - Prob. 8.5WUECh. 8 - Prob. 8.6WUECh. 8 - Prob. 8.1PCh. 8 - Prob. 8.2PCh. 8 - Prob. 8.3PCh. 8 - Prob. 8.4PCh. 8 - Prob. 8.5PCh. 8 - Learning Goal 2 P8-6 Bar charts and risk Swans...Ch. 8 - Prob. 8.7PCh. 8 - Prob. 8.8PCh. 8 - Prob. 8.9PCh. 8 - Prob. 8.10PCh. 8 - Prob. 8.11PCh. 8 - Prob. 8.12PCh. 8 - Prob. 8.13PCh. 8 - Prob. 8.14PCh. 8 - Learning Goal 4 P8- 15 Correlation, risk, and...Ch. 8 - Prob. 8.16PCh. 8 - Learning Goal 5 P8- 17 Total, nondiversifiable,...Ch. 8 - Prob. 8.18PCh. 8 - Prob. 8.19PCh. 8 - Prob. 8.20PCh. 8 - Prob. 8.21PCh. 8 - Prob. 8.22PCh. 8 - Prob. 8.23PCh. 8 - Prob. 8.24PCh. 8 - Prob. 8.25PCh. 8 - Prob. 8.26PCh. 8 - Prob. 8.27PCh. 8 - Learning Goal 6 P8- 28 Security market line (SML)...Ch. 8 - Prob. 8.29PCh. 8 - Prob. 8.30PCh. 8 - Prob. 8.31PCh. 8 - Spreadsheet Exercise Jane is considering investing...
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