Question
Table 1 Estimated Total Returns State of the Economy Probability T-Bond SETX Golden S&P 500 Recession 5% 5% -19% 20% -14% Below Average 15% 5%
Table 1 Estimated Total Returns | |||||
State of the Economy | Probability | T-Bond | SETX | Golden | S&P 500 |
Recession | 5% | 5% | -19% | 20% | -14% |
Below Average | 15% | 5% | 2% | 13% | 3% |
Average | 45% | 5% | 9% | 10% | 11% |
Above Average | 25% | 5% | 34% | 5% | 22% |
Boom | 10% | 5% | 25% | -5% | 33% |
Suppose an investor forms a stock portfolio by investing in Golden and in SETX.
a. What would be the portfolio's expected rate of return, standard deviation, coefficient of variation and Sharpe's ratio? How does this compare with values for the individual stocks? What characteristic of the two investments makes risk reduction possible?
b. What do you think would happen to the portfolio's expected rate of return and standard deviation if the portfolio contained 75 percent Golden Mining? If it contained 75 percent SETX? Using the excel model, calculate the expected returns and standard deviations for a portfolio mix of 0 percent in SETX, 1 percent in SETX, 2 percent in SETX, and so on, up to 100 percent in SETX.
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