Emmy is analyzing a two-stock portfolio that consists of a utility stock and a commodity stock. She knows that the return on the utility stock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 percent. However, she does not know the exact covariance in the returns of the two stocks. Emmy would like to plot the variance of the portfolio for each of three casesâcovariance of 0.060, 0, and â0.060âin order to understand what the variance of the portfolio would be for a range of covariances. Do the calculation for all three cases (0.060, 0, and -0.060), assuming an equal proportion of each stock in the portfolio. Case 1, Ï1,2 = 0.060: variance= ? Case 2, Ï1,2 = 0.0 variance= ? Case 3, Ï1,2 = -0.060: variance= ?
Emmy is analyzing a two-stock portfolio that consists of a utility stock and a commodity stock. She knows that the return on the utility stock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 percent. However, she does not know the exact covariance in the returns of the two stocks. Emmy would like to plot the variance of the portfolio for each of three casesâcovariance of 0.060, 0, and â0.060âin order to understand what the variance of the portfolio would be for a range of covariances. Do the calculation for all three cases (0.060, 0, and -0.060), assuming an equal proportion of each stock in the portfolio. Case 1, Ï1,2 = 0.060: variance= ? Case 2, Ï1,2 = 0.0 variance= ? Case 3, Ï1,2 = -0.060: variance= ?
Related questions
Problem 11-25 Portfolio Returns and Deviations [LO 2]
| Consider the following information on a portfolio of three stocks: |
| State of Economy | Probability of State of Economy | Stock A Rate of Return | Stock B Rate of Return | Stock C Rate of Return |
| Boom | .13 | .02 | .32 | .50 |
| Normal | .55 | .10 | .22 | .20 |
| Bust | .32 | .16 | â.21 | â.35 |
| Required: | |
| (a) | If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolioâs expected return, the variance, and the standard deviation? (Do not round intermediate calculations. Round your variance answer to 5 decimal places (e.g., 32.16161) and input your other answers as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Expected return | % |
| Variance | |
| Standard deviation | % |
| (b) | If the expected T-bill rate is 4.25 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Expected risk premium | % |
Consider the following information on a portfolio of three stocks:
| State of | Probability of | Stock A | Stock B | Stock C | ||||||||
| Economy | State of Economy | Rate of Return | Rate of Return | Rate of Return | ||||||||
| Boom | .12 | .03 | .33 | .49 | ||||||||
| Normal | .54 | .11 | .23 | .21 | ||||||||
| Bust | .34 | .17 | â | .22 | â | .36 | ||||||
a. If your portfolio is invested 38 percent each in A and B and 24 percent in C, what is the portfolioâs expected return, the variance, and the standard deviation? (
