(e) Find the volatility of the portfolio in (d). (f) Would anyone prefer stock A to the...
Fantastic news! We've Found the answer you've been seeking!
Question:
(e) Find the volatility of the portfolio in (d).
(f) Would anyone prefer stock A to the portfolio in (d)? Why or why not.
Transcribed Image Text:
Suppose that there are two assets: A and B. Asset A has expected return of 20% and standard deviation of o* and Asset B has expected return of 12% and standard deviation of o*. Expected Return (E(R)) 20% 12% ● B Standard Deviation (G) Evaluate the following statements independently: (a) "As B is strictly dominated by A in terms of total risk (standard deviation), there is no value in having B in portfolio formation." (Without doing any calculation) [1 point] (b) "If the correlation coefficient p between A and B = 1, it is always optimal to invest in A only." (Show your proof) [2 points] (c) "If the correlation coefficient p between A and B = -1, it is always optimal to invest in 50% in A and 50% in B when forming a minimum variance portfolio of the two." (Show your proof) [2 points] (d) "Given that GA= OB-G*, it is always optimal to combine half of A and half of B when forming a minimum variance portfolio of the two when p € (-1,1)." (Show your proof) [2 points] Suppose that there are two assets: A and B. Asset A has expected return of 20% and standard deviation of o* and Asset B has expected return of 12% and standard deviation of o*. Expected Return (E(R)) 20% 12% ● B Standard Deviation (G) Evaluate the following statements independently: (a) "As B is strictly dominated by A in terms of total risk (standard deviation), there is no value in having B in portfolio formation." (Without doing any calculation) [1 point] (b) "If the correlation coefficient p between A and B = 1, it is always optimal to invest in A only." (Show your proof) [2 points] (c) "If the correlation coefficient p between A and B = -1, it is always optimal to invest in 50% in A and 50% in B when forming a minimum variance portfolio of the two." (Show your proof) [2 points] (d) "Given that GA= OB-G*, it is always optimal to combine half of A and half of B when forming a minimum variance portfolio of the two when p € (-1,1)." (Show your proof) [2 points]
Expert Answer:
Answer rating: 100% (QA)
a To calculate the risk premium first determine the variance of the residuals by squaring the residual standard deviation Then use the expected return ... View the full answer
Related Book For
Fundamentals of Investments Valuation and Management
ISBN: 978-0077283292
5th edition
Authors: Bradford D. Jordan, Thomas W. Miller
Posted Date:
Students also viewed these finance questions
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
1 If your client is not knowledgeable about the market, you should ____ versus comparable portfolios. increase the frequency of trading increase the risk of the portfolio decrease your time with the...
-
Consider two hypothetical stocks, X and Y. The expected return on stock X is equal to 9% and the expected return on stock Y is equal to 15%. Standard deviation of stock X and Y are 19% and 27%,...
-
How do accounting differences impact the usefulness of financial ratio comparisons?
-
A waste treatment pond is 50m long and 15m wide, and has an average depth of 2m. The density of the waste is 85.3lb m /ft 3 . Calculate the weight of the pond contents in lbf, using a single...
-
What is a dual-purpose test?
-
The constant in Eq. (15-22b) is \(1.173 \times 10^{-16}\), which agrees with Geankoplis et al. (2018). However, Cussler (2009) and Wankat and Knaebel (2019) use a constant of 7.4 \(\times 10^{-8}\)....
-
Misfire Company is a small editorial services company owned and operated by Pedro Borman. On August 31, 2010, the end of the current year, Misfire Company's accounting clerk prepared the unadjusted...
-
How is pricing determined in the fulfillment process? Provide examples of data relevant to pricing.
-
Harrison Printing has projected its sales for the first eight months of 2014 as follows: Harrison collects 20 percent of its sales in the month of the sale, 50 percent in the month following the...
-
How to using other method to rewrite the below java code? Eg ,using different loop or different method to do the validation public void enterPlayerName() { Scanner scanner = new Scanner(System.in);...
-
Mint Cleaning Incorporated prepared the following unadjusted trial balance at the end of its second year of operations ending December 3 1 . ( Assume amounts are reported in thousands of dollars. )...
-
Multiply. (3v - 3d)(3v + 2d)
-
The following income statement was drawn from the records of Joel Company, a merchandising firm: JOEL COMPANY Income Statement For the Year Ended December 3 1 , Year 1 Sales revenue ( 2 , 0 0 0 units...
-
1. What is the work done to hold an 12 kg block at rest 0.5 meters above the ground? 2. What is the net work done to lift a 11 kg block a height of 6.2 meters and then lower it back to the ground? 3....
-
What is the direction of the force created by a conductor placed in a magnetic field as shown in the diagram below. S N a) Right Ob) Up Oc) Into the page O d) Left O e) Down
-
A car initially traveling at 28.2 m/s undergoes a constant negative acceleration of magnitude 2.10 m/s 2 after its brakes are applied. (a) How many revolutions does each tire make before the car...
-
In Problem use absolute value on a graphing calculator to find the area between the curve and the x axis over the given interval. Find answers to two decimal places. y = x 3 ln x; 0.1 x 3.1
-
In Problem 14, suppose JC Penney stock sells for $38.13 per share immediately before your options' expiration. What is the rate of return on your investment? What is your rate of return if the stock...
-
You have a car loan with a nominal rate of 6.85 percent. With interest charged monthly, what is the effective annual rate (EAR) on this loan?
-
A stock is currently priced at $63 and has an annual standard deviation of 43 percent. The dividend yield of the stock is 2 percent, and the risk-free rate is 6 percent. What is the value of a call...
-
Rebecca Odin has the following details of her property, plant and equipment. She charges depreciation at 2% per annum on cost for buildings, 10% per annum on cost for machinery, 25% per annum on cost...
-
Deborah Urer owns a small bar. Her trial balance as at 30 June 2012 is set out below. You also have the following additional information. 1. Closing inventory is 6,250. 2. There is 200 owing for...
-
Why do you think that three different types of business enterprise (sole traders, partnerships and limited companies) exist?
Study smarter with the SolutionInn App