Question

Suppose that there are only two stocks, X and Y, listed in a market. There are 200 outstanding shares of stock X and 600 outstanding shares of stock Y. Current prices per share are pX = 40$ and pY = 20$. (i) What is the market portfolio in this market? Suppose that the expected returns on stocks X and Y are μX = 10% and μY = 20%. Standard deviation of returns are σX = 15% and σY = 30%. Covariance between the returns is zero, that is σXY = 0. (ii) What are the expected return and the standard deviation of return on the market portfolio? 1 (iii) Calculate market betas, βX and βY , for stocks X and Y . Suppose that the risk-free rate of return is r0 = 8%. (iv) Verify that the Security Market Line holds for both stocks.

Answer #1

Stocks X, Y, Z are currently traded at PX = $10, PY = $8, and PZ
= $15. Their standard deviations of the returns are σX = 30%, σY =
15%, and σZ = 20%. The return correlations between:
[1]XandYis-0.7,[2]XandZis0.2,and[3]YandZis0.5.
a. What is the standard deviation of the returns of the
equal-weighted portfolio of Stock X and Y?
b. What is the standard deviation of the returns of the
value-weighted portfolio of Stock X and Z?

Summary statistics for returns on two stocks X and Y are listed
below.
Mean
Variance
Stock X
4.83%
0.005000
Stock Y
3.98%
0.004000
The covariance of returns on stocks X and Y is 0.003700.
Consider a portfolio of 40% stock X and 60% stock Y.
What is the variance of portfolio returns?
Please round your answer to six decimal places.
Note that the correct answer will be evaluated based on the
full-precision result you would obtain using Excel.

Let X and Y be two independent random variables with
μX =E(X)=2,σX =SD(X)=1,μY =2,σY =SD(Y)=3.
Find the mean and variance of
(i) 3X
(ii) 6Y
(iii) X − Y

Stocks X and Y have the following probability distributions of
expected future returns:
Probability
Stock X
Stock Y
0.15
-5%
-8%
0.35
7%
10%
0.30
15%
18%
0.20
10%
25%
Expected return
Standard deviation
6.42%
Correlation between Stock X and Stock Y
0.8996
i. Calculate the expected return for each stock.
ii. Calculate the standard deviation of returns for Stock Y.
iii. You have $2,000. You decide to put $500 of your money in
Stock X and the rest in...

Suppose an investor can invest in two stocks, whose returns are
random variables X and Y, respectively. Both are assumed to have
the same mean returns E(X) = E(Y) = μ; and they both have the same
variance Var(X) = Var(Y) = σ2. The correlation between X and Y is
some valueρ.
The investor is considering two invesment portfolios: (1)
Purchase 5 shares of the first stock (each with return X ) and 1 of
the second (each with return...

Two stocks (A and B) have a covariance of 23. When combined in
equal proportions into portfolio Y, the variance of the portfolio
is 30.25. Stock A has a variance twice that of Stock B. Another
portfolio (X) has an expected return of 17% and a variance of
50.
Additional Information
The expected return on the market is 15% and the risk free rate
is 7%
Covariance (A,Market) = 22 and Covariance (B,Market) = 15.5
Variance of the Market is...

Expected return on two stocks for two particular market
returns:
Market
Return
Aggressive Stock
Defensive Stock
5%
2%
8%
20%
25%
20%
What are the betas of the two stocks?
What is the expected rate of return on each stock if the market
return is equally likely to be 5% or 20%?
If the T-bill rate is 4% and the market return is equally
likely to be 5% or 20%, draw the SML for this economy.
Between aggressive and defensive...

Use the following scenario analysis for stocks X and Y to answer
the questions.
Bear
Normal
Bull
Market
Market
Market
Probability
20.00%
45.00%
35.00%
Stock X
-13.00%
11.00%
28.00%
Stock Y
-26.00%
16.00%
46.00%
Assume you have a $200,000 portfolio and you invest $75,000 in
stock X and the remainder in stock Y. If the risk–free rate of
return is 3.50%, and we assume that the standard deviation of the
excess returns on the portfolio is 18%, what is the...

Stocks X and Y have the following probability distributions of
expected future returns:
Probability
X
Y
0.1
-6%
-24%
0.2
5
0
0.4
15
20
0.2
22
25
0.1
35
35
Calculate the expected rate of return, rY, for Stock Y (rX =
14.30%.) Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns, ?X, for
Stock X (?Y = 16.32%.) Round your answer to two decimal
places.
%
Now calculate the coefficient of variation...

Expected return on two stocks for two particular market
returns: Please show all work.
Market
Return
Aggressive Stock
Defensive Stock
5%
1%
8%
20%
25%
18%
What are the betas of the two stocks?
What is the expected rate of return on each stock if the market
return is equally likely to be 5% or 20%?
If the T-bill rate is 3% and the market return is equally
likely to be 5% or 20%, draw the SML...

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