The financial markets of country X are not very developed: there are only two companies, A and B, which are traded. The expected rate of return on A is 8% and 14% on B; the standard deviations of their rates of return are 5% for A and 10% for B and the correlation coefficient between their returns is 0.1.
a. Calculate the expected return and standard deviation of the following portfolios:
portfolio Percentage in A Percentage in B
P1 0 100
P2 40 60
P3 60 40
P4 80 20
P5 100 0
b. Represent in a graph (with the standard deviation of the portfolio on the horizontal axis and the expected returns on the vertical axis) the points corresponding to the combinations of expected return-standard deviation for each of the above portfolios. Draw approximately theset of all feasible expected returns-standard deviations that can be obtained by investing in the two stocks A and B.
c. Which of the above portfolios are ecient?
The financial markets of country X are not very developed: there are only two companies, A and B, which are traded. The expected rate of return on A is 8% and 14% on B; the standard deviations of their rates of return are 5% for A and 10% for B and the correlation coefficient between their returns is 0.1.
a. Calculate the expected return and standard deviation of the following portfolios:
portfolio Percentage in A Percentage in B
P1 0 100
P2 40 60
P3 60 40
P4 80 20
P5 100 0
b. Represent in a graph (with the standard deviation of the portfolio on the horizontal axis and the expected returns on the vertical axis) the points corresponding to the combinations of expected return-standard deviation for each of the above portfolios. Draw approximately theset of all feasible expected returns-standard deviations that can be obtained by investing in the two stocks A and B.
c. Which of the above portfolios are ecient?
Related questions
| Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .086, E(RB) = .146, ÏA = .356, and ÏB = .616. |
| a-1. | Calculate the expected return of a portfolio that is composed of 31 percent Stock A and 69 percent Stock B when the correlation between the returns on A and B is .46. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| Expected return | % |
| a-2. | Calculate the standard deviation of a portfolio that is composed of 31 percent Stock A and 69 percent Stock B when the correlation between the returns on A and B is .46. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| Standard deviation | % |
| b. | Calculate the standard deviation of a portfolio with the same portfolio weights as in part (a) when the correlation coefficient between the returns on Stocks A and B is â.46. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| Standard deviation | % |
Consider the following two funds and their estimated returns under different states of the economy:
| State of economy | Probability | Estimated Return (Fund A) | Estimated Return (Fund B) |
| Great | 25% | 10% | 25% |
| Average | 30% | 15% | 11% |
| Poor | 40% | 20% | 15% |
Calculate the following:
- Expected return for fund A and for fund B
- Standard deviation of returns for fund A and fund B
- Covariance between returns of fund A and fund B
- Correlation between returns of fund A and fund B
If you invest $2,000 in Fund A and $6,000 in Fund B, Calculate the following:
- Portfolios
