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Suppose you have information below on two companies in the food retail sector: Stock Tesco Sainsbury Expected Return Standard Deviation 44% 23% 24% 14%

Suppose you have information below on two companies in the food retail sector: Stock Tesco Sainsbury Expected Return Standard Deviation 44% 23% 24% 14% You have also information about their correlation, which is around 55%. a) Calculate the expected return and the volatility of a portfolio of Tesco's and Sainsbury's stocks that is equally weighted. b) Suppose you have 10,000 to invest in these two stocks. Calculate the expected return and the volatility of a portfolio that consists of a long position of 15,000 in Tesco and a short position of 5,000 in Sainsbury. What is the meaning of "short position" here? Briefly comment on the resulting portfolio. c) Calculate now the expected return and the volatility of a portfolio consisting of Tesco's and Sainsbury's stocks using a wide range of portfolio weights. Plot the expected returns as a function of their corresponding volatilities. What are the efficient combinations of the two stocks? i. ii. d) Given the information provided in the table, change the correlation among the two stocks as follow: 100%, 0, -50% and -100%. How does the frontier of all combinations of the two stocks change? e) Suppose now that on top of your initial capital of 10,000, you decide to borrow another 5,000 at 4% interest rate and decide to invest the entire amount of 15,000 in the portfolio of Tesco's and Sainsbury's stocks of point a) (the equally weighted one). Given the expected return and volatility you found in point a): What is the expected return and volatility of the new investment? What is your realized return if your portfolio goes up 25% over the year? What return do you realize if your portfolio goes down by 20% over the year?

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a To calculate the expected return and volatility of an equally weighted portfolio of Tesco and Sainsbury stocks we can use the following formulas Expected Return of Portfolio Weight of Tesco Expected ... blur-text-image

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