Hi,

i would like you to answer the question that i didn't solve yet. in the word sheet!

they are 4 to 5 question..

Thank you,

Chapter 6 Efficient Diversification McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved. 6.1 Diversification and Portfolio Risk 6.2 Asset Allocation With Two Risky Assets 6-2 Two-Security Portfolio: Return E(rp )= W1 r1 + W2 r2 W1 = Proportion of funds in Security 1 W2 = Proportion of funds in Security 2 r1 = Expected return on Security 1 r2 = Expected return on Security 2 n E(r p ) W r ; i i n # securities in the portfolio i 1 6-3 Two-Security Portfolio Return E(rp) = W1r1 + W2r2 W1 = 0.6 Wi = % of total money invested in security i W2 = 0.4 r1 9.28% = r2 11.97% = E(rp) = 0.6(9.28%) + 0.4(11.97%) = 10.36% 6-4 Combinations of risky assets When we put stocks in a portfolio, p E[r2] so that rp that contains stocks 1 and 2 remains E[rp] close to n = # securities in the portfolio What statistics measure the tendency for r1 to be above expected when r2 is below expected? Covariance and Correlation 6-5 Portfolio Variance and Standard Deviation 2 p Q Q [W I W J Cov(rI , rJ )] I J 1 1 WI , W J Percentage of the total portfolio invested in stock I and J respectively Q The total number of stocks in the portfolio Cov(rI , rJ ) Covariance of the returns of Stock I and Stock J If I J then Cov (rI , rJ ) I 2 & Cov(rI , rJ ) Cov (rJ , rI ) Variance of a Two Stock Portfolio: p 2 W12 12 2W1W 2 Cov(r1, r2 ) W 2 2 2 2 6-6 Expost Covariance Calculations N (r r 1 ) (r 2, T r 2 ) n 1, T Cov(r1, r2 ) n 1 T 1 n r 1 average or expected return for stock 1 r 2 average or expected return for stock 2 n # of observatio ns If when r1 > E[r1], r2 > E[r2], and when r1 E[r1], r2 E[r2], then COV will be _______. negative Which will \"average away\" more risk? 6-7 Covariance and Correlation The problem with covariance Covariance does not tell us the intensity of the comovement of the stock returns, only the direction. We can standardize the covariance however and calculate the correlation coefficient which will tell us not only the direction but provides a scale to estimate the degree to which the stocks move together. 6-8 Measuring the Correlation Coefficient Standardized covariance is called the correlation coefficient or _____________________ (1,2) Cov(r1, r2 ) 1 2 For Stock 1 and Stock 2 6-9 and Diversification in a 2 Stock Portfolio is always in the range __________ inclusive. -1.0 to +1.0 What does (1,2) = +1.0 imply? The two are perfectly positively correlated. Means? If (1,2) = +1, then (1,2) = W1 1 + W2 2 - What does (1,2) = -1.0 imply? There are very large diversification benefits from combining 1 and 2. Are there any diversification benefits from combining 1 and 2? The two are perfectly negatively correlated. Means? If (1,2) = -1, then (1,2) = (W1 1 - W2 2) It is possible to choose W1 and W2 such that (1,2) = 0. 6-10 and Diversification in a 2 Stock Portfolio What does -1 1 what do we know? If i 1 lower beta (closer to 1) in the future. A firm with a beta ___ will tend to have a