Question

An investor is putting together an investment portfolio, which will consist of three asset classes: U.S....

An investor is putting together an investment portfolio, which will consist of three asset classes: U.S. stocks, U.S. bonds, and a money market account. The investor has projected the following key variables: expected return risk (standard deviation) U.S. stocks 14% 12% U.S. bonds 8% 7% money market 6% 4% The correlation between U.S. stocks and U.S. bonds is 0.40. The correlation between U.S. stocks and the money market is 0.22. The correlation between U.S. bonds and the money market is 0.70. Write out the formula (with the numbers filled in) to calculate the variance of the following portfolio: U.S. stocks: 60%; U.S. bonds: 20%; money market: 20%. You do not have to do the actual calculation. (8 points).

Homework Answers

Answer #1

Portfolio Variance with 3 Securities

where Wa = Weight of stock a ; Wb = Weight of Stock B; Wc = Weight of Stock C σa = Standard deviation of stock A; σb = Standard deviation of stock B; σc = Standard deviation of stock C; r ab= Correlation Coefficient between a & b ; r bc= Correlation Coefficient between b & c; r ac= Correlation Coefficient between a & c

With the information given in the question

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
An analyst has projected the following. probability stocks return (%) bonds return (%) .25 14% -2%...
An analyst has projected the following. probability stocks return (%) bonds return (%) .25 14% -2% .45 -4% 8% .30 8% 4% (a) Calculate the expected return for stocks and for bonds. (6 points). (b) Calculate the variance of stocks and bonds. (8 points). (c) Write out the formula, with the numbers filled in, to find the correlation between stocks and bonds. You do not have to do the actual calculation.
An investor is considering to create a portfolio of two stocks, A (for airline) and E...
An investor is considering to create a portfolio of two stocks, A (for airline) and E (for energy). Based on data of past two years, each stock is represented by a rate of return mean and standard deviation of the rates of return as follows: Mean                         Standard Deviation Stock A          8%                              10% Stock E          14%                            20% The correlation coefficient between these two stocks is calculated as -0.8. If the investor chooses to split his money on these two stocks as...
What is a “basis point”? ANSWER:            Can you easily find asset classes that possess positive...
What is a “basis point”? ANSWER:            Can you easily find asset classes that possess positive returns, above that of inflation, which also possess negative correlation? (Yes or No.) ANSWER:            Explain the concept of “multi-asset class investing” in your own words. ANSWER:            The author states that both “U.S. stocks and U.S. bonds have real positive returns over time.” What is “real return”? What is “nominal return”? ANSWER:            The author states: “There is no known way to design a portfolio that...
1. If you were able to put together a portfolio that completely eliminated all risk, what return would you expect to earn and why?
1. If you were able to put together a portfolio that completely eliminated all risk, what return would you expect to earn and why?This question is a real eye opener, in that with great risk can come great reward. The asset classes I can think of to present to me a zero-risk situation in the portfolio would be the following: Savings account, CD certificate, bonds, treasuries, and ponds. I expect to get minimal and low return on investment. Obviously the...
A pension fund manager is considering three mutual funds. The first is a stock fund, the...
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 4.7%. The probability distributions of the risky funds are:    Expected Return Standard Deviation Stock fund (S) 17 % 37 % Bond fund (B) 8 % 31 % The correlation between the fund returns is .1065. Suppose now that your portfolio...
A pension fund manager is considering three mutual funds. The first is a stock fund, the...
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.4%. The probability distributions of the risky funds are:    Expected Return Standard Deviation Stock fund (S) 15 % 44 % Bond fund (B) 8 % 38 % The correlation between the fund returns is .0684. Suppose now that your portfolio...
PLEASE ANSWER THEM ALL, WILL GIVE THUMBS UP 1) Which Statement is True? a) ABC Corp....
PLEASE ANSWER THEM ALL, WILL GIVE THUMBS UP 1) Which Statement is True? a) ABC Corp. has a return on investment (ROI) of 12% and a weighted average cost of capital (WACC) of 11%, while XYZ Corp. has an ROI of 10% and a WACC of 8%. In this situation, XYZ is performing better than ABC because XYZ is generating a higher Economic Value Added (EVA) b) If you were super rich and had a huge portfolio of stocks that...
ECO 101-S70: Final Quiz 2 CHAPTER 3: Demand, Supply and Equilibrium 1. Which of the following...
ECO 101-S70: Final Quiz 2 CHAPTER 3: Demand, Supply and Equilibrium 1. Which of the following could cause a decrease in consumer demand for product X? a.   a decrease in consumer income b.   an increase in the prices of goods which are good substitutes for product X c. an increase in the price which consumers expect will prevail for product X in the future d. a decrease in the supply of product X 2. If two goods are substitutes for...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how the firms resources incompetencies support the given pressures regarding costs and local responsiveness. Describe entry modes have they usually used, and whether they are appropriate for the given strategy. Any key issues in their global strategy? casestudy: Atlanta, June 17, 2014. Sea of Delta employees and their families swarmed between food trucks, amusement park booths, and entertainment venues that were scattered throughout what would...
Please answer the following Case analysis questions 1-How is New Balance performing compared to its primary...
Please answer the following Case analysis questions 1-How is New Balance performing compared to its primary rivals? How will the acquisition of Reebok by Adidas impact the structure of the athletic shoe industry? Is this likely to be favorable or unfavorable for New Balance? 2- What issues does New Balance management need to address? 3-What recommendations would you make to New Balance Management? What does New Balance need to do to continue to be successful? Should management continue to invest...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT