Question
Consider the following information on Pepsi and Apple stocks: The expected return on the market portfolio is 12% and its standard deviation is 24%. The
Consider the following information on Pepsi and Apple stocks:
The expected return on the market portfolio is 12% and its standard deviation is 24%. The risk-free rate is 6%. The correlation coefficient between Pepsi and Apple is 0.65. Assume that CAPM holds. There are no short-selling restrictions, and you can borrow and lend at the risk-free rate.
(Round your final answers to 2 decimal places. Enter percentages "as-is", without the % sign, enter weights as decimals (e.g., 5.873% return would be entered as 5.87. A weight of 0.257 would be entered as 0.26)).
a) Find the expected returns on Pepsi and Apple.
Pepsi % Apple %
b) Imagine you have $1000 cash to invest. You short-sell $500 worth of Pepsi and put the proceeds along with your own capital into the Apple stock (total of $1500). What is the expected return and standard deviation of this portfolio?
Expected Return % Standard Deviation %
c) Find the efficient portfolio E offering the same expected return as the portfolio in part b (find means specify the weights of the assets). What is the standard deviation of this portfolio?
Weight Pepsi Weight Apple Weight Market Weight Risk-free
Portfolio E Std. Dev. %
d) Find the efficient portfolio F offering the same standard deviation as the portfolio in part b (find means specify the weights of the assets). What is the expected return of this portfolio?
Weight Pepsi Weight Apple Weight Market Weight Risk-free
Portfolio F Exp. Ret. %
Consider the following information on Pepsi and Apple stocks: Beta Pepsi 0.39 12% Apple 1.25 36% Standard Deviation The expected return on the market portfolio is 12% and its standard deviation is 24%. The risk-free rate is 6%. The correlation coefficient between Pepsi and Apple is 0.65. Assume that CAPM holds. There are no short-selling restrictions, and you can borrow and lend at the risk-free rate. (Round your final answers to 2 decimal places. Enter percentages "as-is", without the % sign, enter weights as decimals (e.g., 5.873% return would be entered as 5.87. A weight of 0.257 would be entered as 0.26)). a) Find the expected returns on Pepsi and Apple. Pepsi 1% Apple % b) Imagine you have $1000 cash to invest. You short-sell $500 worth of Pepsi and put the proceeds along with your own capital into the Apple stock (total of $1500). What is the expected return and standard deviation of this portfolio? Expected Return 1% Standard Deviation % c) Find the efficient portfolio E offering the same expected return as the portfolio in part b ("find" means specify the weights of the assets). What is the standard deviation of this portfolio? Weight Pepsi Weight Apple Weight Market Weight Risk-free Portfolio E Std. Dev. % d) Find the efficient portfolio F offering the same standard deviation as the portfolio in part b ("find" means specify the weights of the assets). What is the expected return of this portfolio? Weight Pepsi Weight Apple Weight Market Weight Risk-free Portfolio F Exp. Ret. %Step by Step Solution
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