Question
You have the following information regarding rates of return for two stocks, B and C: Probability Rate of Return (%) Stock B Stock C
You have the following information regarding rates of return for two stocks, B and C: Probability Rate of Return (%) Stock B Stock C 0.1 5 30 0.4 15 20 0.4 20 20 0.1 25 10 Suppose you want to construct the following portfolios with stocks B & C: Portfolio Wb We Portfolio Expected rate of return 0.0 1.0 234567 0.1 0.9 0.2 0.8 0.3 0.7 0.4 0.6 0.5 0.5 0.6 0.4 8** 0.7 0.3 9 0.8 0.2 11 11 10 0.9 0.1 1.0 0.0 Portfolio Standard deviation Portfolio #2 consists of stocks B and C. The weight of stock B (Wb) in your portfolio is 10% and the weight of stock C (Wc) is 90%. ** Similarly, portfolio #8 consists of stocks B and C. The weight of stock B (Wb) in your portfolio is 70% and the weight of stock C (We) is 30%. 1. Calculate the expected rate of return and the risk (standard deviation) of each of the above 11 portfolios. 2. Plot the above 11 portfolios in the risk-return space. Note that the y-axis is expected rate of return and x-axis is standard deviation. Each portfolio will be a point in the risk-return space. Join all those points to draw the graph. Check panel c of figure 3-2 on page 116 of your textbook. You can use EXCEL to plot the graph. 3. Suppose you want to construct the minimum-risk (minimum-variance) portfolio with stocks B & C. Calculate the expected rate of return and the risk (standard deviation) of the minimum-risk portfolio.
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