#7
Suppose Target's stock has an expected return of 24% and a volatility of 38%, Hershey's stock has an expected return of 13% and a volatility of 24%, and these two stocks are uncorrelated. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? Consider a new stock with an expected return of 18.5% and a volatility of 27%. Suppose this new stock is uncorrelated with Target's and Hershey. b. Is holding this stock alone attractive compared to holding the portfolio in (a)? c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? The expected return is %. (Round to one decimal place.) The volatility is %. (Round to one decimal place.) Consider a new stock with an expected return of 18.5% and a volatility of 27%. Suppose this new stock is uncorrelated with Target's and Hershey's stock. b. Is holding this stock alone attractive compared to holding the portfolio in (a)? (Select the best choice below.) A. Yes, the new stock dominates Target. B. No, Target dominates the new stock. C. Yes, the new stock dominates Hershey, so you should hold this stock alone. D. No, a combination of the Hershey and Target stocks has the same expected return but with a lower volatility. c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain. (Select the best choice below.) A. No, although the new stock dominates Hershey, the portfolio of Hershey and Target dominates the new stock so there is no reason to hold B. Yes, but you should just hold the new stock by itself. C. Yes, you are always better off holding the new stock than Hershey, so you should just replace Hershey with the new stock. D. Yes, by holding a combination of all 3 stocks you can reduce risk while leaving expected return unchanged. Suppose Target's stock has an expected return of 24% and a volatility of 38%, Hershey's stock has an expected return of 13% and a volatility of 24%, and these two stocks are uncorrelated. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? Consider a new stock with an expected return of 18.5% and a volatility of 27%. Suppose this new stock is uncorrelated with Target's and Hershey. b. Is holding this stock alone attractive compared to holding the portfolio in (a)? c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? The expected return is %. (Round to one decimal place.) The volatility is %. (Round to one decimal place.) Consider a new stock with an expected return of 18.5% and a volatility of 27%. Suppose this new stock is uncorrelated with Target's and Hershey's stock. b. Is holding this stock alone attractive compared to holding the portfolio in (a)? (Select the best choice below.) A. Yes, the new stock dominates Target. B. No, Target dominates the new stock. C. Yes, the new stock dominates Hershey, so you should hold this stock alone. D. No, a combination of the Hershey and Target stocks has the same expected return but with a lower volatility. c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain. (Select the best choice below.) A. No, although the new stock dominates Hershey, the portfolio of Hershey and Target dominates the new stock so there is no reason to hold B. Yes, but you should just hold the new stock by itself. C. Yes, you are always better off holding the new stock than Hershey, so you should just replace Hershey with the new stock. D. Yes, by holding a combination of all 3 stocks you can reduce risk while leaving expected return unchanged
