Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

We are faced with the possibility of forming an equity portfolio, by combining an investment in two American stocks included in the S&P 500 index:

We are faced with the possibility of forming an equity portfolio, by combining an investment in two American stocks included in the S&P 500 index: Walt Disney (DIS US Equity) and Colgate Palmolive (CL US Equity).

We know the current prices of their quotes (DIS $ 33.84; CL $ 91.62) and the volatilities of both shares (DIS 17.89%; CL 15.0%). Likewise, we know that the correlation between the price of both stocks is 0.65 and that the Betas of both stocks with respect to the S&P 500 are 1.12 and 0.85, respectively. The 12-month analyst consensus target prices are DIS $ 38 and CL $ 100.6.

  1. Calculate the expected returns, volatilities and betas of the different combinations of both securities (assuming successive variations of 5% in the exposure levels).
  2. Graph the efficient frontier.
  3. What could we say about a portfolio made up of both titles with a volatility of 16.11% and that offered us an expected return of 10.80%?
  4. Knowing that we do not want to form a portfolio with a Beta greater than 1 and that, assuming that the expected returns follow a normal distribution, we do not want to bear a loss greater than -18.57% with a 95% probability, what combination of assets would we select?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

Answer To solve this problem we will use the principles of modern portfolio theory and the CAPM Capi... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction to Finance Markets Investments and Financial Management

Authors: Melicher Ronald, Norton Edgar

15th edition

9781118800720, 1118492676, 1118800729, 978-1118492673

More Books

Students also viewed these Finance questions

Question

How does selection differ from recruitment ?

Answered: 1 week ago