Question
The following stocks issued by companies X, Y and Z are available and an investor wants to set up a two-asset portfolio. Use the following
The following stocks issued by companies X, Y and Z are available and an investor wants to set up a two-asset portfolio. Use the following information, explain which portfolio the investor should prefer. Assume that the investor will hold both assets in equal proportions.
Stock X
Today Rs40
Forecasted prices (after 1 month) Rs45
Rs42
Rs40
Rs38
Rs35
Probability 0.5
0.2
0.1
0.1
0.1
Stock Y
Today Rs50
Forecasted prices (after 1 month) Rs62
Rs58
Rs48
Rs45
Probability 0.3
0.2
0.4
0.1
Stock Z
Today Rs60
Forecasted prices (1 month) Rs70
Rs65
Rs60
Rs59
Probability 0.2
0.4
0.1
0.3
The relationship between the returns of the stocks are measured as follows:
Covariances:
COVXY COVXY
COVYZ COVXY
COVXZ COVXY
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Managerial Accounting Creating Value in a Dynamic Business Environment
Authors: Ronald Hilton, David Platt
12th edition
1259969517, 1260566390, 978-1260417043
