Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

4. You are considering a portfolio of three stocks: Stock A has an expected return of 8%, with a standard deviation of 20%. Stock B

image text in transcribed
4. You are considering a portfolio of three stocks: Stock A has an expected return of 8%, with a standard deviation of 20%. Stock B has an expected return of 4%, with a standard deviation of 10%. Stock C has an expected return of 3%, with a standard deviation of 7%. The correlation coefficients between these stocks' return are: Stock A with Stock B: 0.1 Stock A with Stock C: 0.2 Stock B with Stock C: 0.5 (a) Based on these data, construct a covariance matrix for the returns on the three stocks and calculate the inverse covariance matrix. (b) Calculate the expected return and standard deviation of the minimum variance portfolio. (C) Suppose the target portfolio return pv = 5%, calculate the wights in the portfolio and the risk of this portfolio (d) Suppose that a risk free asset with return f = 2% is introduced to the portfolio. Calculate the expected return and standard deviation of the market portfolio and find the equation of the capital market line. (e) If add three more stocks to the portfolio, how many variances and how many unique covariance will you need to calculate the portfolio variance (Do not calculate the portfolio variance)? 4. You are considering a portfolio of three stocks: Stock A has an expected return of 8%, with a standard deviation of 20%. Stock B has an expected return of 4%, with a standard deviation of 10%. Stock C has an expected return of 3%, with a standard deviation of 7%. The correlation coefficients between these stocks' return are: Stock A with Stock B: 0.1 Stock A with Stock C: 0.2 Stock B with Stock C: 0.5 (a) Based on these data, construct a covariance matrix for the returns on the three stocks and calculate the inverse covariance matrix. (b) Calculate the expected return and standard deviation of the minimum variance portfolio. (C) Suppose the target portfolio return pv = 5%, calculate the wights in the portfolio and the risk of this portfolio (d) Suppose that a risk free asset with return f = 2% is introduced to the portfolio. Calculate the expected return and standard deviation of the market portfolio and find the equation of the capital market line. (e) If add three more stocks to the portfolio, how many variances and how many unique covariance will you need to calculate the portfolio variance (Do not calculate the portfolio variance)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Principles Of Finance Wtih Excel

Authors: Simon Benninga, Tal Mofkadi

3rd Edition

0190296380, 9780190296384

More Books

Students also viewed these Finance questions

Question

Be able to cite the advantages of arbitration

Answered: 1 week ago