Question

**6. Portfolio expected return and risk**

A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the investor’s expected rate of return.

Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio.

Consider the following case:

Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table:

Stock |
Percentage of Portfolio |
Expected Return |
Standard Deviation |
---|---|---|---|

Artemis Inc. | 20% | 6.00% | 38.00% |

Babish & Co. | 30% | 14.00% | 42.00% |

Cornell Industries | 35% | 13.00% | 45.00% |

Danforth Motors | 15% | 3.00% | 47.00% |

What is the expected return on Andre’s stock portfolio?

14.04%

10.40%

7.80%

15.60%

Suppose each stock in Andre’s portfolio has a correlation coefficient of 0.4 (ρ = 0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the partially diversified four-stock portfolio is 43%, the portfolio’s standard deviation (σpσp) most likely is 43%.

Answer #1

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A collection of financial assets and securities is referred to
as a portfolio. Most individuals and institutions invest in a
portfolio, making portfolio risk analysis an integral part of the
field of finance. Just like stand-alone assets and securities,
portfolios are also exposed to risk. Portfolio risk refers to the
possibility that an investment portfolio will not generate the
investor’s expected rate of return.
Analyzing portfolio risk and return involves the understanding
of expected returns from a portfolio.
Consider the...

Assume that CAPM is a good representation of the risk-return
relationship. You are holding a portfolio of stocks. The
portfolio’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...

You have constructed a portfolio consisting of 65 percent risky
securities with expected return 17 percent and standard deviation
12 percent and 35 percent T-bills with a return of 0.4 percent.
Find the expected return and standard deviation of this
portfolio.

You invest $100 in a portfolio of stock JET and a risk-free
asset with a return of 5%. JET has an expected return of 12% and a
standard deviation of 10%. What is the percentage of your portfolio
in the risk-free asset if your portfolio’s standard deviation is
9%?
A. 30%
B. 90%
C. 50%
D. 10%

You invest $100 in a portfolio of stock JET and a risk-free
asset with a return of 5%. JET has an expected return of 12% and a
standard deviation of 10%. What is the percentage of your portfolio
in the risk-free asset if your portfolio’s standard deviation is
9%? A. 30% B. 90% C. 50% D. 10%

. Portfolio risk and return
Emma holds a $5,000 portfolio that consists of four stocks. Her
investment in each stock, as well as each stock’s beta, is listed
in the following table:
Stock
Investment
Beta
Standard Deviation
Andalusian Limited (AL)
$1,750
0.90
12.00%
Tobotics Inc. (TI)
$1,000
1.30
12.00%
Water and Power Co. (WPC)
$750
1.20
18.00%
Makissi Corp. (MC)
$1,500
0.40
19.50%
Suppose all stocks in Emma’s portfolio were equally weighted.
Which of these stocks would contribute the least...

CAPM, portfolio risk, and return
Consider the following information for three stocks, Stocks A,
B, and C. The returns on the three stocks are positively
correlated, but they are not perfectly correlated. (That is, each
of the correlation coefficients is between 0 and 1.)
Stock
Expected Return
Standard Deviation
Beta
A
8.32
%
16
%
0.8
B
10.40
16
1.3
C
12.06
16
1.7
Fund P has one-third of its funds invested in each of the three
stocks. The risk-free...

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...

7. Portfolio risk and return
Ariel holds a $7,500 portfolio that consists of four stocks. Her
investment in each stock, as well as each stock’s beta, is listed
in the following table:
Stock
Investment
Beta
Standard Deviation
Perpetualcold Refrigeration Co. (PRC)
$2,625
0.90
18.00%
Zaxatti Enterprises (ZE)
$1,500
1.70
11.00%
Western Gas & Electric Co. (WGC)
$1,125
1.10
18.00%
Flitcom Corp. (FC)
$2,250
0.60
25.50%
Suppose all stocks in Ariel’s portfolio were equally weighted.
Which of these stocks would contribute...

8. Portfolio risk and return
Elle holds a $10,000 portfolio that consists of four stocks. Her
investment in each stock, as well as each stock’s beta, is listed
in the following table:
Stock
Investment
Beta
Standard Deviation
Perpetualcold Refrigeration Co. (PRC)
$3,500
0.90
15.00%
Kulatsu Motors Co. (KMC)
$2,000
1.50
12.00%
Water and Power Co. (WPC)
$1,500
1.20
18.00%
Makissi Corp. (MC)
$3,000
0.50
22.50%
Suppose all stocks in Elle’s portfolio were equally weighted.
Which of these stocks would contribute...

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