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5. Suppose that there are 5 possible scenarios, each of which has equal probability of occurrence. The rate of return on stock A, stock B
5. Suppose that there are 5 possible scenarios, each of which has equal probability of occurrence. The rate of return on stock A, stock B and stock C depends on the scenarios as follows: Use Excel file "Homework 1 Exercise 5", which is available in Canvas under title "Homework 1 " in section "Modules" and calculate the following in Excel: a) Calculate the expected rate of return on stock A, the expected rate of return on stock B and the expected rate of return on stock C. (5 points) b) Calculate the variance and the standard deviation of returns on stock A, on stock B and on stock C. (5 points) c) Calculate the covariance between the returns of stock A and stock B, the covariance between the returns on stock A and C and the covariance between the returns on stock B and C. (5 points) d) Calculate the expected rate of return on portfolio, which contains 50% of stock A and 50% of stock B. (2.5 points) e) Calculate the risk (variance and standard deviation) of the portfolio, which contains 50% of stock A and 50% of stock B. (5 points) f) Calculate the expected rate of return on portfolio, which contains 50% of stock B and 50% of stock C. (2.5 points) g) Calculate the risk (variance and standard deviation) of the portfolio, which contains 50% of stock B and 50% of stock C. (5 points) h) Explain, whether a risk-averse investor would choose the portfolio, which contains 50% of stock A and 50% of stock B, or a portfolio, which contains 50% of stock B and 50% of stock C? Provide a brief justification ( 1 or 2 sentences, based on your earlier calculations), why? (5 points)
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