Question

Stock X has an expected return of 12% and the standard deviation of the expected return...

Stock X has an expected return of 12% and the standard deviation of the expected return is 20%. Stock Z has an expected return of 7% and the standard deviation of the expected return is 15%. The correlation between the returns of the two stocks is +0.3. These are the only two stocks in a hypothetical world.

What is the expected return and the standard deviation of a portfolio consisting of 80% Stock X and 20% Stock Z? Will any rational investor hold this portfolio (in this hypothetical two stock world)? Explain why or why not.

What is the expected return and the standard deviation of a portfolio consisting of 20% Stock X and 80% Stock X? Will any rational investor hold this portfolio (in this hypothetical two stock world)? Explain why or why not. (You might want to do Part C first).

What is the maximum amount of Stock Z a rational investor will hold in his or her portfolio? What is the expected return and the standard deviation of this portfolio? The maximum amount is a percentage between 0% and 100%, and to receive full credit your answer should be within 1 percentage points of the correct answer. (Hint: Set up Excel to calculate the portfolio expected return and standard deviation as a function of the portfolio weights, which must sum to 100%. You can find the correct answer to this part by manually changing the portfolio weights, or by using the Solver function on Excel).

Explain why different rational investors might hold different portfolios of these two stocks. Identify the range of portfolios a rational investor might hold. Your answer should take this form: A rational investor will hold a maximum of ___% in Stock X (with ___% in Z), or a minimum of _____% in Stock X (with _____ in Z). The set of feasible portfolios will fall within the range defined by these two end points.

Homework Answers

Answer #1

Rational Investor will Invest in 80% of X and 20% of Y beacuse of Higher sharpe ratio than the Individual Securities.

Rational Investor will NOT Invest in 20% of X and 80% of Y because of Lower sharpe ratio than Stok A. So a rational Investor invest total cash in Stock X instead of Investing 80% in Y and 20% in X

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Stock X has an expected return of 12% and the standard deviation of the expected return...
Stock X has an expected return of 12% and the standard deviation of the expected return is 20%. Stock Z has an expected return of 7% and the standard deviation of the expected return is 15%. The correlation between the returns of the two stocks is +0.3. These are the only two stocks in a hypothetical world. What is the expected return and the standard deviation of a portfolio consisting of 80% Stock X and 20% Stock Z? Will any...
QUESTION 12 The investor is presented with the two following stocks: Expected Return Standard Deviation Stock...
QUESTION 12 The investor is presented with the two following stocks: Expected Return Standard Deviation Stock A 10% 30% Stock B 20% 60% Assume that the correlation coefficient between the stocks is -1. What is the standard deviation of the return on the portfolio that invests 30% in stock A? A. 26% B. 49% C. 30% D. 33%
Stock 1 has a expected return of 14% and a standard deviation of 12%. Stock 2...
Stock 1 has a expected return of 14% and a standard deviation of 12%. Stock 2 has a expected return of 11% and a standard deviation of 11%. Correlation between the two stocks is 0.5. Create a minimum variance portfolio with long positions in both stocks. What is the return on this portfolio?
Assume Stocks A and B have the following characteristics: Stock Expected Return Standard Deviation A 8.3%...
Assume Stocks A and B have the following characteristics: Stock Expected Return Standard Deviation A 8.3% 32.3% B 14.3% 61.3% The covariance between the returns on the two stocks is .0027. a. Suppose an investor holds a portfolio consisting of only Stock A and Stock B. Find the portfolio weights, XA and XB, such that the variance of her portfolio is minimized. (Hint: Remember that the sum of the two weights must equal 1.) (Do not round intermediate calculations and...
Q1. Stock X has a standard deviation of 13% and stock Y’s standard deviation is 18%....
Q1. Stock X has a standard deviation of 13% and stock Y’s standard deviation is 18%. The portfolio has exhibited a standard deviation of 10% when 65% of the funds were allocated in Stock X. What is the expected covariance between stocks X and Y? Select one: a. -0.21 b. -0.10 c. -0.95 d. -24.40 Q2. The set of portfolios with the maximum rate of return for every given risk level is known as the optimal frontier. Select one: a....
You have a two-stock portfolio. One stock has an expected return of 12% and a standard...
You have a two-stock portfolio. One stock has an expected return of 12% and a standard deviation of 24%. The other has an expected return of 8% and a standard deviation of 20%. You invested in these stocks equally (50% of your investment went toward each of the two stocks). If the two stocks are negatively correlated, which one of the following is the most feasible standard deviation of the portfolio? 25% 22% 18% not enough information to determine
You have a portfolio with a standard deviation of 26% and an expected return of 18%....
You have a portfolio with a standard deviation of 26% and an expected return of 18%. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 20% of your money in the new stock and 80% of your money in your existing? portfolio, which one should you? add? expected return standard deviation correlation with your portfolios return stock a 13% 24% 0.4 stock b 13% 17% 0.6 Standard deviation...
Given the following information: Expected return of Stock A .12 (12%) Standard Deviation of A's Return...
Given the following information: Expected return of Stock A .12 (12%) Standard Deviation of A's Return 1 Expected return on stock B .2 (20%) Standard Deviation of B's return 6 Correlation Coefficient of the returns on stock A & stock B -.6 (this is not the covariance, it is the CC) If as an investor I chose to invest 75% of my funds into stock A, and 25% into stock B, what is the measure of my coefficient of variation...
Stock A has an expected return of 13% and a standard deviation of 22%, while Stock...
Stock A has an expected return of 13% and a standard deviation of 22%, while Stock B has an expected return of 15% and a standard deviation of 25%. If an investor is less risk-averse, they will be likely to choose… A. Stock A B. Stock B Stock A has a beta of 1.8 and an expected return of 12%. Stock B has a beta of 0.7 and an expected return of 7%. If the risk-free rate is 2% and...
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard...
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. a. Calculate each stock’s coefficient of variation. b. Which stock is riskier for a diversified investor? c. Calculate each stock’s required rate of return. d. On the basis of the two...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT