Question

Can you explain the relationship of covariance and correlation coefficient in the expected return of portfolio investment?

Answer #1

Explain the significance of correlation coefficient and the
covariance in the portfolio design strategies.How does it influence
the benefits that can be derived from the diversification?

explain the concept of covariance. How is covariance
used in Computing the correlation coefficient?

The covariance and correlation coefficient are measures that
quantify the non-linear relationship between two variables.
T/F

You have asset ABC. Its covariance with the market portfolio is
0.01. The expected price of the market portfolio is $120. Its
current price is $100. The standard deviation of the market
portfolio returns is 20%. The risk free rate is 5%.
(a) What is the expected return of company ABC? (b) What is the
expected return of company XYZ if the covariance of its returns
with the market is 0.05?

Assume that CAPM is a good representation of the risk-return
relationship. You are holding a portfolio of stocks. The
portfolioâ€™s standard deviation is 40% and its correlation with "M"
is 0.8. The risk free rate is 2.5%, the expected market return is
12%, and the standard deviation of the market return is 17.6%.
What is the expected return on your portfolio?
Is this portfolio efficient? How can you tell?
If this portfolio is not efficient, how much risk reduction
could...

1. There are 2 assets you can invest in: a risky portfolio with
an expected return of 6% and volatility of 15%, and a government
t-bill (always used as the 'risk-free' asset) with a guaranteed
return of 1%. Your risk-aversion coefficient A = 4, and the utility
you get from your investment portfolio can be described in the
standard way as U = E(r) - 1/2 * A * variance. Assume that you can
borrow money at the risk-free rate....

security proportion portfolio expected return
standard deviation
A 50% 15% 18%
B 50% 24% 24%
correlation coefficient 0.35
Calculate a) i. Expected return of each portfolio ii. Standard
deviation of each portfolio
b. advice management on which portfolio to invest in

Suppose you invest equal amounts in a portfolio with an expected
return of 12% and a standard deviation of returns of 16% and a
risk-free asset with an interest rate of 2%. calculate the expected
return on the resulting Portfolio.
A. 9%
B. unable to determine without knowing the correlation
coefficient
C. 8%
D. 7%
E. 12%
F. 2%
SHOW WORK PLEASE

Create a portfolio using the four stocks and information
below:
Expected Return
Standard Deviation
Weight in Portfolio
Stock A
21.00%
16.00%
17.00%
Stock B
34.00%
33.00%
22.00%
Stock C
33.00%
21.00%
16.00%
Stock D
27.00%
27.00%
45.00%
----------------------
----------------------
----------------------
----------------------
Correlation (A,B)
0.4400
----------------------
----------------------
Correlation (A,C)
0.3300
----------------------
----------------------
Correlation (A,D)
0.9400
----------------------
----------------------
Correlation (B,C)
0.7000
----------------------
----------------------
Correlation (B,D)
0.0200
----------------------
----------------------
Correlation (C,D)
0.6400
----------------------
----------------------
all answered right exept the last two
(Do not...

The sample correlation coefficient is equal to the covariance of
x and y
divided by the square root of the product of
sx2 times sy2.
True
False

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