1. Consider the returns of two shares, A and B, under three possible scenarios: Scenario Stock A Stock B I II -50% 6% 19% Probability 8% III 15% -1% 28% 23% 69% Compute (a) the expected returns of the stocks A and B; (b) the standard deviation of the returns of the stocks A and B; (c) how can you find the minimum variance portfolio? Show the method and provide the weights; (d) the expected return and the standard deviation of the portfolio where the wealth allocated to the A stock is three times that of the B stock. (e) Assuming the risk free rate is equal to 5% write the equation of the Capital Allocation Line for the portfolio in point (d). What does the slope represents? A

1. Consider the returns of two shares, A and B, under three possible scenarios: Scenario Stock A Stock B I II -50% 6% 19% Probability 8% III 15% -1% 28% 23% 69% Compute (a) the expected returns of the stocks A and B; (b) the standard deviation of the returns of the stocks A and B; (c) how can you find the minimum variance portfolio? Show the method and provide the weights; (d) the expected return and the standard deviation of the portfolio where the wealth allocated to the A stock is three times that of the B stock. (e) Assuming the risk free rate is equal to 5% write the equation of the Capital Allocation Line for the portfolio in point (d). What does the slope represents? A

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Consider the following probability distribution for stocks A and B: Table 4 Probability Distribution for Stocks A and B State Probability Return on Stock A Return on Stock B 1 0.1 10% 8% 2 0.2 13% 7% 3 0.2 12% 6% 4 0.3 14% 9% 5 0.2 15% 8% The variances of Stocks A and B are _____ and _____, respectively. Group of answer choices .015%; .019% .022%; .012% .032%; .02% .015%; .011% .014%; .021%
Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% Calculate covariance and coefficient of correlation between the returns of thestocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfoliocomprising of $45,000 invested in stock A and remaining amount in stock B.Calculate risk and return of your portfolio.
The probability distribution of returns for the two stocks X and Y are as follows: Probability 0.1 0.3 0.05 0.25 0.15 0.15 For each of the two stocks, calculate: a. The expected return. b. Variance of returns c. Volatility of returns. Stock X 0.05 -0.1 0.08 -0.08 0.20 0.12 Return Stock Y 0.13 0,04 -0.12 0.21 0.1 -0.05
(a) Calculate the expected rate of return, variance and standard deviation of Stock X & Stock Y. (b) Assume that the covariance between Stock X and Stock Y is -0.005. Calculate the expected rate of return, variance and standard deviation of Jenny’s portfolio. {Hint: you can express your answers for the variance and standard deviation in decimals or percentage form:• For decimals, the covariance in your equation should be -0.005• For percentage, the covariance in your equation should be -50%2(= -50/10000)] (c) Explain why, in general, the portfolio risk is lower than the weighted average of individual stocks’ risk. (d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates ofreturn of Stock X and Stock Y. (e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain.
KINDLY ANSWER PART 5,6.and 7 Using the stock price data for any two companies provided below carry out the following tasks: 1.Compute, for each asset: i.Total Returns ii.Expected returns iii.standard deviation iv.Correlation Coefficient 2.Construct the variance-covariance matrix 3.Construct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 4.Reconstruct equally weighted portfolio and calculate Expected Return, Standard Deviation and Sharpe ratio. 5.Use Solver to determine optimal risky portfolio. 6.Create hypothetical portfolios (commencing from Weight A=0 and weight B=100) 7.Calculate Expected return and Standard Deviation for all the above combinations 8.Graph the efficient frontier 9.Graph the optimal portfolio 10.Assuming that the investors prefers lower level of risk than what a portfolio of risky assets offer, introduce a risk free asset in the portfolio with a return of 3% 11.Using hypothetical weights (A= Portfolio of Risky…
In the CML graph below, MVE refers to the market portfolio, and A, B, C are three stocks. Assume that all assets are priced correctly under the CAPM. What is the beta and systematic variance of stock B? Expected Return [E] 35% 30% 25% 20% 15% 10% 5% OE. 0% 0% Select one: O A. 1, 0.04 O B. 1, 0.16 O C. O D. 10% MVE CML (Capital Market Line) 20% A 30% Standard Deviation [SD(r)] 1.5, 0.09 1, 0.4 Cannot be determined from the information given C B 40% 50% 60%
Portfolios A and B are both well-diversified. The risk-free rate is 8%. The return for the market is 10%. Portfolio A has an expected return of 15% and beta of 1.1. Portfolio B has an expected return of 9% and beta of 0.20. Portfolio A's variance is 9%, whilst Portfolio B's variance is 5.5%. Calculate for Portfolio A and Portfolio B the following: 1. Sharpe's Measure, 2. Treynor's Measure, 3. Jensen's Measure. Which is the better portfolio according to each measure?
The market and Stock J have the following probability distributions: ProbabIlity rM rJ 0.3 15% 20% 0.4 9 5 0.3 18 12 A. Calculate the expected rates of return for the market and Stock J. B. Calculate the standard deviations for the market and Stock J
a) Share X and Share Y have the following returns with their respective probabilities. Share X Share Y Return Probability Return Probability 10% 0.3 15% 0.35% 0.31% 0.4-4% 0.4-10% 0.3 Calculate the following: i) The expected rate of returns for both shares. ii) The standard deviation for both shares. ii) On a stand-alone basis, select which stock is the riskier..
Consider the following information for four portfolios, the market, and the risk-free rate (RFR): Portfolio Return Beta SD A1 0.15 1.25 0.182 A2 0.1 0.9 0.223 A3 0.12 1.1 0.138 A4 0.08 0.8 0.125 Market 0.11 1 0.2 RFR 0.03 0 0 Refer to Exhibit 18.6. Calculate the Jensen alpha Measure for each portfolio. a. A1 = 0.014, A2 = -0.002, A3 = 0.002, A4 = -0.02 b. A1 = 0.002, A2 = -0.02, A3 = 0.002, A4 = -0.014 c. A1 = 0.02, A2 = -0.002, A3 = 0.002, A4 = -0.014 d. A1 = 0.03, A2 = -0.002, A3 = 0.02, A4 = -0.14 e. A1 = 0.02, A2 = -0.002, A3 = 0.02, A4 = -0.14
Given the returns and probabilities for the three possible states listed below, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns of Stock A and Stock B are 8.10 percent and 11.60 percent, respectively. (Round answer to 4 decimal places, e.g. 0.0768.) Good OK Poor Covariance Probability 0.22 0.60 0.18 Return on Stock A 0.30 0.10 -0.25 Return on Stock B 0.50 0.10 -0.30
Give typing answer with explanation and conclusion Assume that two stocks are available. The first stock (Stock A) has an expected return of 25% and a standard deviation of 20%; the second stock (Stock B) has an expected return of 12% and a standard deviation of 10%. If the correlation between the stocks is 0.10, what are the weight of Stock A (WA) and Weight of Stock B(WB) in the minimum-variance portfolio? WA=17.39%, WB=82.61% WA=14.29%, WB=85.71% WA=10.30%, WB=89.70% WA=30.25%, WB=69.75%

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