Question

Problem 6-05 Given: E(R1) = 0.09 E(R2) = 0.17 E(σ1) = 0.04 E(σ2) = 0.05 Calculate...

Problem 6-05

Given:

E(R1) = 0.09
E(R2) = 0.17
E(σ1) = 0.04
E(σ2) = 0.05

Calculate the expected returns and expected standard deviations of a two-stock portfolio in which Stock 1 has a weight of 60 percent under the conditions given below. Do not round intermediate calculations. Round your answers for the expected returns of a two-stock portfolio to three decimal places and answers for expected standard deviations of a two-stock portfolio to four decimal places.

  1. r1,2 = 1.00

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  2. r1,2 = 0.70

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  3. r1,2 = 0.20

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  4. r1,2 = 0.00

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  5. r1,2 = -0.20

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  6. r1,2 = -0.70

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  7. r1,2 = -1.00

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Weight of Stock 1 =60%
E(R1)=0.09
E(σ1) = 0.04

Weight of Stock 2 =40%
E(R2)=0.17
E(σ2) = 0.05

a) at r1,2 = 1.00
Expected Return =Weight of Stock 1*E(R1)+Weight of Stock 2*E(R2) =60%*0.09+40%*0.17 =0.122
Standard Deviation =((Weight of 1*E(σ1))^2+(Weight of 2*E(σ2))^2+2*Weight of 1*Weight of 2*E(σ1)*E(σ2)*r1,2)^0.5
=((60%*0.04)^2+(40%*0.05)^2+2*60%*40%*0.04*0.05*1)^0.5=0.0440

b) at r1,2 = 0.7
Expected Return =Weight of Stock 1*E(R1)+Weight of Stock 2*E(R2) =60%*0.09+40%*0.17 =0.122
Standard Deviation =((Weight of 1*E(σ1))^2+(Weight of 2*E(σ2))^2+2*Weight of 1*Weight of 2*E(σ1)*E(σ2)*r1,2)^0.5
=((60%*0.04)^2+(40%*0.05)^2+2*60%*40%*0.04*0.05*0.7)^0.5=0.04060

c) at r1,2 = 0.2
Expected Return =Weight of Stock 1*E(R1)+Weight of Stock 2*E(R2) =60%*0.09+40%*0.17 =0.122
Standard Deviation =((Weight of 1*E(σ1))^2+(Weight of 2*E(σ2))^2+2*Weight of 1*Weight of 2*E(σ1)*E(σ2)*r1,2)^0.5
=((60%*0.04)^2+(40%*0.05)^2+2*60%*40%*0.04*0.05*0.2)^0.5=0.0342

d)at r1,2 = 0
​​​​​​​ Expected Return =Weight of Stock 1*E(R1)+Weight of Stock 2*E(R2) =60%*0.09+40%*0.17 =0.122
Standard Deviation =((Weight of 1*E(σ1))^2+(Weight of 2*E(σ2))^2+2*Weight of 1*Weight of 2*E(σ1)*E(σ2)*r1,2)^0.5
=((60%*0.04)^2+(40%*0.05)^2+2*60%*40%*0.04*0.05*0)^0.5=0.0312

e) at r1,2 = -0.2
​​​​​​​ Expected Return =Weight of Stock 1*E(R1)+Weight of Stock 2*E(R2) =60%*0.09+40%*0.17 =0.122
Standard Deviation =((Weight of 1*E(σ1))^2+(Weight of 2*E(σ2))^2+2*Weight of 1*Weight of 2*E(σ1)*E(σ2)*r1,2)^0.5
=((60%*0.04)^2+(40%*0.05)^2+2*60%*40%*0.04*0.05*-0.2)^0.5=0.0280

f)at r1,2 = -0.7
​​​​​​​ Expected Return =Weight of Stock 1*E(R1)+Weight of Stock 2*E(R2) =60%*0.09+40%*0.17 =0.122
Standard Deviation =((Weight of 1*E(σ1))^2+(Weight of 2*E(σ2))^2+2*Weight of 1*Weight of 2*E(σ1)*E(σ2)*r1,2)^0.5
=((60%*0.04)^2+(40%*0.05)^2+2*60%*40%*0.04*0.05*-0.7)^0.5=0.0174

g) at r1,2 =-1
​​​​​​​ Expected Return =Weight of Stock 1*E(R1)+Weight of Stock 2*E(R2) =60%*0.09+40%*0.17 =0.122
Standard Deviation =((Weight of 1*E(σ1))^2+(Weight of 2*E(σ2))^2+2*Weight of 1*Weight of 2*E(σ1)*E(σ2)*r1,2)^0.5
=((60%*0.04)^2+(40%*0.05)^2+2*60%*40%*0.04*0.05*-1)^0.5=0.0040

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Given: E(R1) = 0.13 E(R2) = 0.17 E(σ1) = 0.05 E(σ2) = 0.06 Calculate the expected...
Given: E(R1) = 0.13 E(R2) = 0.17 E(σ1) = 0.05 E(σ2) = 0.06 Calculate the expected returns and expected standard deviations of a two-stock portfolio having a correlation coefficient of 0.75 under the conditions given below. Do not round intermediate calculations. Round your answers to four decimal places. w1 = 1.00 Expected return of a two-stock portfolio: Expected standard deviation of a two-stock portfolio: w1 = 0.80 Expected return of a two-stock portfolio: Expected standard deviation of a two-stock portfolio:...
Problem 6-06 Given: E(R1) = 0.12 E(R2) = 0.16 E(σ1) = 0.04 E(σ2) = 0.07 Calculate...
Problem 6-06 Given: E(R1) = 0.12 E(R2) = 0.16 E(σ1) = 0.04 E(σ2) = 0.07 Calculate the expected returns and expected standard deviations of a two-stock portfolio having a correlation coefficient of 0.65 under the conditions given below. Do not round intermediate calculations. Round your answers to four decimal places. w1 = 1.00 Expected return of a two-stock portfolio: Expected standard deviation of a two-stock portfolio: w1 = 0.75 Expected return of a two-stock portfolio: Expected standard deviation of a...
E(R1) = 0.13 E(R2) = 0.15 E(σ1) = 0.01 E(σ2) = 0.03 Calculate the expected returns...
E(R1) = 0.13 E(R2) = 0.15 E(σ1) = 0.01 E(σ2) = 0.03 Calculate the expected returns and expected standard deviations of a two-stock portfolio in which Stock 1 has a weight of 80 percent under the conditions given below. Do not round intermediate calculations. Round your answers for the expected returns of a two-stock portfolio to three decimal places and answers for expected standard deviations of a two-stock portfolio to four decimal places. r1,2 = 1.00 Expected return of a...
– You are considering two assets with the following characteristics: E(R1) = 0,15 E(σ1) = 0,10...
– You are considering two assets with the following characteristics: E(R1) = 0,15 E(σ1) = 0,10 w1 = 0,5 E(R2) = 0,20 E(σ2) = 0,20 w2 = 0,5 Compute the mean and standard deviation of two portfolios if r1,2 = + 0,30 and - 0,40, respectively. Plot the two portfolios on a risk-return graph and briefly explain the results.
, Stocks A and B have the following​ returns: Stock A Stock B 1 0.09 0.07...
, Stocks A and B have the following​ returns: Stock A Stock B 1 0.09 0.07 2 0.07 0.04 3 0.12 0.04 4 −0.03    0.02 5 0.08 −0.05    a. What are the expected returns of the two​ stocks? b. What are the standard deviations of the returns of the two​ stocks? c. If their correlation is 0.46 ,what is the expected return and standard deviation of a portfolio of 76​% stock A and 24​% stock​ B? a. What are the...
Stocks A and B have the following​ returns: Stock A Stock B 1 0.09 0.07 2...
Stocks A and B have the following​ returns: Stock A Stock B 1 0.09 0.07 2 0.06 0.01 3 0.12 0.06 4 −0.02    0.02 5 0.08 −0.04    a. What are the expected returns of the two​ stocks? b. What are the standard deviations of the returns of the two​ stocks? c. If their correlation is 0.47 what is the expected return and standard deviation of a portfolio of 75​% stock A and 25​% stock​ B?
Stocks A and B have the following returns: Stock A Stock B 1 0.08 0.04 2...
Stocks A and B have the following returns: Stock A Stock B 1 0.08 0.04 2 0.04 0.03 3 0.13 0.04 4 -0.03 0.03 5 0.07 -0.05 Stocks A and B have the following​ returns: Stock A Stock B 1 0.080.08 0.040.04 2 0.040.04 0.030.03 3 0.130.13 0.040.04 4 negative 0.03−0.03    0.030.03 5 0.070.07 negative 0.05−0.05    a. What are the expected returns of the two​ stocks? b. What are the standard deviations of the returns of the two​ stocks? c....
Stocks A and B have the following​ returns:  ​(Click on the following icon    in order...
Stocks A and B have the following​ returns:  ​(Click on the following icon    in order to copy its contents into a​ spreadsheet.) Stock A Stock B 1 0.09 0.07 2 0.06 0.02 3 0.13 0.04 4 −0.05    0.02 5 0.08 −0.01    a. What are the expected returns of the two​ stocks? b. What are the standard deviations of the returns of the two​ stocks? c. If their correlation is 0.47​, what is the expected return and standard deviation of...
Suppose the expected returns and standard deviations of stocks A and B are E( RA )...
Suppose the expected returns and standard deviations of stocks A and B are E( RA ) = 0.15, E( RB ) = 0.21, σ A = 0.48, and σ B = 0.72, respectively. Required: (a) Calculate the expected return and standard deviation of a portfolio that is composed of 42 percent A and 58 percent B when the correlation between the returns on A and B is 0.46. (Round your answers to 2 decimal places. (e.g., 32.16))   Expected return %...
Given the returns and probabilities for the three possible states listed here, calculate the covariance between...
Given the returns and probabilities for the three possible states listed here, 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 0.09 and 0.17, respectively. (Round your answer to 4 decimal places. For example .1244) Probability Return(A) Return(B) Good 0.35 0.30 0.50 OK 0.50 0.10 0.10 Poor 0.15 -0.25 -0.30
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT