Question
You are considering three stocks. Stock A has an expected return of 5%. Stock B has an expected...
- You are considering three stocks. Stock A has an expected return of 5%. Stock B has an expected return of 12%. Stock C has an expected return of 16%. You have the following variance-covariance matrix.
|
Stock A |
Stock B |
Stock C |
|
|
Stock A |
.070 |
.050 |
-.060 |
|
Stock B |
.050 |
.100 |
-.025 |
|
Stock C |
-.060 |
-.025 |
.170 |
- Calculate the expected return and portfolio variance assuming
you invest $100,000 in stock A, $200,000 in stock B, and $300,000
in stock C.
- How does this answer in (A) compare to investing in stock B
alone?
- Calculate the expected return and portfolio variance assuming
you invest $200,000 in each stock.
- Explain the difference between your answers in (A) and in
(C).
- Now assume that, in addition to the above investments in (A),
you invest an additional $400,000 in long-term Treasury securities
earning 4%. Calculate the expected return and variance
of this 4-security portfolio worth $1,000,000.
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