You are currently considering in investing Rs.1.2 million in equity investment portfolio. Your analysis reveals that equity stock of the following three companies are suitable options for your investment. Company P 25 R 20 22 26 Expected retum (%) Standard deviation (%) Correlation coefficient; PQ QR PR 30 24 -0.5 +0.4 +0.6 (b) Assume you prefer a portfolio consisting of two stocks, each with an equal amount of investment. Calculate expected retums and standard deviation of all possible two-stock portfolios.

You are currently considering in investing Rs.1.2 million in equity investment portfolio. Your analysis reveals that equity stock of the following three companies are suitable options for your investment. Company P 25 R 20 22 26 Expected retum (%) Standard deviation (%) Correlation coefficient; PQ QR PR 30 24 -0.5 +0.4 +0.6 (b) Assume you prefer a portfolio consisting of two stocks, each with an equal amount of investment. Calculate expected retums and standard deviation of all possible two-stock portfolios.

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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You are currently considering in investing Rs.1.2 million in equity investment portfolio. Your analysis reveals that equity stock of the following three companies are suitable options for your investment. Company P R Expected retum (%) Standard deviation (%) Correlation coefficient; 25 22 20 30 26 24 PQ QR -0.5 +0.4 PR +0.6 You are required to; (a) Calculate the expected returm of the portfolio if Rs.1.2 million is equally invested in the stocks of all three companies.
Consider an investment portfolio that consists of three different stocks, with the amount invested in each asset shownbelow. Assume the risk-free rate is 2.5% and the market risk premium is 6%. Use this information to answer thefollowing questions.Stock Weights BetasChesapeake Energy 25% 0.8Sodastream 50% 1.3Pentair 25% 1.0a) Compute the expected return for each stock using the CAPM and assuming that the stocks are all fairly priced.b) Compute the portfolio beta and the expected return on the portfolio.c) Now assume that the portfolio only includes 50% invested in Pentair and 50% invested in Sodastream (i.e., a twoassetportfolio). The yearly-return standard deviation of Pentair is 48% and the yearly-return standard deviation ofSodastream is 60%. The correlation coefficent between Pentair’s returns and Sodastream’s returns is 0.3 What is theexpected yearly-return standard deviation for this portfolio?
Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return 0.25 13% 0.25 −7% 0.50 14% 0.25 7% 0.25 18% 0.25 16% 0.25 23% (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. Given the information in the table, the expected rate of return for stock A is enter your response here %. (Round to two decimal places.) Part 2 The standard deviation of stock A is enter your response here %. (Round to two decimal places.) Part 3 b. The expected rate of return for stock B is enter your response here %. (Round to two decimal places.) Part 4 The standard deviation for stock B is enter…
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 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 0.65
Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Return Probability Return 0.35 13% 0.25 −7% 0.30 17% 0.25 8% 0.35 21% 0.25 15% 0.25 23% (Click on the icon in order to copy its contents into a spreadsheet.) Question content area bottom Part 1 a. Given the information in the table, the expected rate of return for stock A is enter your response here%. (Round to two decimal places.)
You are facing three stock investment alternatives, Stock A, Stock B and Stock C. Given the following information, please indicate which stock is (are) overvalued, which stock is (are) undervalued, and which stock is (are) correctly priced based on the required returns calculation using the Capital Asset Pricing Model (CAPM or Security Market Line=SML). The risk free rate is 3% and the risk premium for the market index return is 5%. Please Show Work Expected Stocks Returns BETA A 14% 1.2 B 8% 0.67 C 20% 2.5
Assume you have invested in two other stocks: Stock A has a beta of 1.20 and Stock B has a beta of 0.8. Rf= 2% and Rm = 12%. (i) Using CAPM, what are the expected returns for each stock? Return of stock = Risk free rate + beta ( market rate of return - risk free rate of return) Return of Stock A = 2% + 1.20 (12% - 2%) = 2.12% Return of Stock B = 2% + 0.80 (12% - 2%) = 2.08% (ii) What is the expected return of an equally weighted portfolio of these two stocks? Weight of stock A = 0.50 Weight of Stock B = 0.50 Expected return = (Return of Stock A * weight of Stock A) + (Return of Stock B * weight of stock B) = (2.12 * 0.50) + (2.08*0.50) = 1.06 + 1.04 = 3% (iii) What is the beta of an equally weighted portfolio of these two stocks? Beta of portfolio = (Beta of Stock A * weight of stock A) + (Beta of Stock B * weight of Stock B) = (1.20*0.50) + (0.80*0.50) = 0.60 + 0.40 = 1 Beta of portfolio = 1 (iv) Sketchthe SML to…
Assume you have invested in two other stocks: Stock A has a beta of 1.20 and Stock B has a beta of 0.8. Rf= 2% and Rm = 12%. Using CAPM, what are the expected returns for each stock? Return of stock = Risk free rate + beta ( market rate of return - risk free rate of return) Return of Stock A = 2% + 1.20 (12% - 2%) = 2.12% Return of Stock B = 2% + 0.80 (12% - 2%) = 2.08% What is the expected return of an equally weighted portfolio of these two stocks? Weight of stock A = 0.50 Weight of Stock B = 0.50 Expected return = (Return of Stock A * weight of Stock A) + (Return of Stock B * weight of stock B) = (2.12 * 0.50) + (2.08*0.50) = 1.06 + 1.04 = 3% What is the beta of an equally weighted portfolio of these two stocks? Beta of portfolio = (Beta of Stock A * weight of stock A) + (Beta of Stock B * weight of Stock B) = (1.20*0.50) + (0.80*0.50) = 0.60 + 0.40 = 1 Beta of portfolio = 1 (iv) Sketch the SML to represent the…
(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Probability 0.25 0,50 0.25 Probability 0.10 0.40 0.40 0.10 (Click on the icon in order to copy its contents into a apreadsheet) Common Stock B Return 10% 17% 18% Return -4% 7% 13% 20% G a. Given the information in the table, the expected rate of return for stock A is 15.5% (Round to two decimal places) The standard deviation of stock A is (Round to two decimal places.)
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
(c) Consider information given in the table below and answers the question asked thereafter: iv. Calculate covariance and coefficient of correlation between the returns of the stocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfolio comprising of $35,000 invested in stock A and remaining amount in stock B. Calculate risk and return of your portfolio. (d) Firm A reports a Profit Margin of 6.5% and a Total Asset Turnover Ratio of 3.25. Their total asset level is $8,500,000. Assume there are 700,000 shares outstanding and the PE ratio is 11. Also, assume the Return on Equity is 16%. Based on this, calculate the MV/BV ratio.
1. You estimate the Fama-French 3-factor model for the two stocks, A and B, and find the following coefficients. You also estimate risk premiums for each factor. Calculate the cost of equity capital (i.e., expected rate of return) for each company using the 3-factor APT model. The risk-free rate is 4%. Stock Mkt A B Risk premiums 1.1 1.0 5% SMB -1.2 -2.0 HML -1.0 -1.5 3%

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