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2) Suppose you have $ 10,000 available for investment. Your stock broker has suggested that you invest in either stock A or stock B. You
2) | Suppose you have $ 10,000 available for investment. | |||||
Your stock broker has suggested that you invest in either stock A or stock B. | ||||||
You are concerned about the riskiness of the stocks. | ||||||
During your investigation, you find the historical returns on these stocks: | ||||||
a) | Calculate the average annual returns and standard deviation for these stocks. | |||||
b) | Suppose you decide to invest in both the stocks in the ratio of 50:50. | |||||
Calculate the portfolio return each year and the average expected return. | ||||||
Calculate the portfolio return and standard deviation for the entire period. | ||||||
c) | Likewise, what would be the expected return & Standard Devation | |||||
if the portfolio weights are 25:75. | ||||||
d) | Likewise, what would be the expected return & Standard Devation | |||||
if the portfolio weights are 75:25. | ||||||
e) | Which one would you choose from among the 5 options: | |||||
stock A, stock B or portfolio 50:50, portfolio 75:25 or portfolio 25:75? | ||||||
Year | Stock A Returns | Stock B Returns | Portfolio 50:50 | Portfolio 25:75 | Portfolio 75:25 | |
2007 | 8.40% | 7.60% | ? | ? | ? | |
2008 | -2.10% | 21.90% | ? | ? | ? | |
2009 | 19.60% | -3.40% | ? | ? | ? | |
2010 | 7.50% | 17.40% | ? | ? | ? | |
2011 | 11.80% | 12.70% | ? | ? | ? | |
Expected Return | ? | ? | ? | ? | ? | |
Standard Deviation | ? | ? | ? | ? | ? | |
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