Question

The standard deviation of expected returns for investments X and Y equal 10.3% and 7.8%, respectively....

The standard deviation of expected returns for investments X and Y equal 10.3% and 7.8%, respectively. The correlation between returns for X and Y is 0.30. How much risk reduction, that is diversification benefit in basis points, does the minimum risk portfolio provide?

a. 112 b. 134 c. 154 d. 178 e. 193

Homework Answers

Answer #1
Weights of a Minimum variance portfolio =
wx= (Sdy^2 - r x SDx x Sdy)/(SDx^2 +Sdy^2 - 2 x r x SDx x SDy)
7.8^2 - 0.3/(10.3^2+7.8^2-2x0.3x10.3x7.8)
0.309435
Wy = 1- wx
0.690565
SDp= Sq Root (Wx^2 x SDx^2 + Wy^2 x SDy^2 + 2 x Wx x Wy x Cov(x,y))
Wx^2 x sdx^2 = 10.15813
Wy^2 x sdy^2 = 29.01337
2 x Wx x Wy x Cov(x,y) = 10.30047
49.47197
SDp = Sq Root (1812.112) 7.034
Weighted average sd =
wx x sdx + wy x sdy = 8.574
Diversification benefit = 8.574 - 7.034 = 1.540
Diversification benefit (Basis point)= 1.54 x 100 = 154
(answer c)
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
There are three distinct frontier portfolios, A, B and C. Portfolio Expected Returns Standard Deviation A...
There are three distinct frontier portfolios, A, B and C. Portfolio Expected Returns Standard Deviation A 0.4 0.40 B 0.2 0.30 C 0.3 0.25 Compute, ρAB, the correlation between frontier portfolios A and B. Calculate the expected return on the global minimum variance portfolio. Calculate the maximum possible Sharpe Ratio from these frontier portfolios, when the risk free rate is 2% per annum. d. Explain, illustrating with graphs, the difference between the portfolio frontier when there is a risk free...
You are constructing a portfolio of two assets, asset X and asset Y. The expected returns...
You are constructing a portfolio of two assets, asset X and asset Y. The expected returns of the assets are 7 percent and 20 percent, respectively. The standard deviations of the assets are 15 percent and 40 percent, respectively. The correlation between the two assets is .30 and the risk-free rate is 2 percent. Required: a) What is the optimal Sharpe ratio in a portfolio of the two assets? b) What is the smallest expected loss for this portfolio over...
X and Y are domestic stocks in country X and country Y, respectively. The mean and...
X and Y are domestic stocks in country X and country Y, respectively. The mean and standard deviation (SD) of monthly returns, over a given period of time, for the stock markets of two countries, X and Y are Country X: mean = 1.57%, SD = 4.87% Country Y: mean = 1.92%, SD = 7.64% Assuming that the monthly risk-free interest rate is 0.4%, what are the Sharpe performance measures, SHP(X) and SHP(Y)? Which one is superior? Continue from the...
the expected return and standard deviation of S is 14% and 29%, respectively. the expected return...
the expected return and standard deviation of S is 14% and 29%, respectively. the expected return and standard deviation of B is 6% and 15%, respectively. correlation between S and B is -0.1 T-bill rate is 1% and The client’s risk aversion (A) is 8 1- What is the expected return and standard deviation of the optimal risky portfolio?  2-Find the proportion of the optimal risky portfolio (= y) in your client’s complete portfolio. 3-What is the expected return and standard...
Stocks X and Y have the following probability distributions of expected future returns: Probability Stock X...
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...
Asset 1 has a standard deviation of returns equal to 4% per year, and an expected...
Asset 1 has a standard deviation of returns equal to 4% per year, and an expected return of 2.5% per year. Asset 2 has a standard deviation of returns equal to 25% per year, and an expected return of 6% per year. The correlation between the two assets is 0.2. What is the standard deviation of a portfolio that has 50% in asset 1 and 50% in asset 2?.
1. Stocks X and Y have the following probability distributions: Returns Probability X Y 0.10 -5%...
1. Stocks X and Y have the following probability distributions: Returns Probability X Y 0.10 -5% -22% 0.20 -2% -3% 0.30 1% 6% 0.20 4% 17% 0.20 7% 24% (8 points) If you form a 50-50 portfolio of the two stocks, calculate the expected rate of return and the standard deviation for the portfolio.      (Remember, you must calculate a new range of outcomes for the portfolio.) Briefly explain why the standard deviation for the portfolio would be less than the...
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...
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...
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