Question
The stock of Jones Trucking is expected to return 15 percent annually with a standard deviation of 7 percent. The stock of Bush Steel Mills
The stock of Jones Trucking is expected to return 15 percent annually with a standard deviation of 7 percent. The stock of Bush Steel Mills is expected to return 20 percent annually with a standard deviation of 10 percent. The correlation between the returns from the two securities has been estimated to be +0.5. The beta of the Jones stock is 1.1, and the beta of the Bush stock is 1.4. The risk-free rate of return is expected to be 5 percent, and the expected return on the market portfolio is 15 percent. The current dividend for Jones is $3. The current dividend for Bush is $5.
a. What is the expected return from a portfolio containing the two securities if 50 percent of your wealth is invested in Jones and 50 percent is invested in Bush? Round your answer to one decimal place. %
b. What is the expected standard deviation of the portfolio of the two stocks? Round your answer to two decimal places. %
c. Which stock is the better buy in the current market? Round your answers to one decimal place. Required return (Jones): %
Required return (Bush): %
d. The (Jones or Bush?) stock is the better buy because the expected return is (lower or higher?) than the required return.
*include all calculations in excel
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started