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Your crystal ball predicts the following returns on stock A, stock B, and the market portfolio: Stock A 8.6% Stock B Period 1 12.8%
Your crystal ball predicts the following returns on stock A, stock B, and the market portfolio: Stock A 8.6% Stock B Period 1 12.8% Market 10.0% 2 11.0 17.0 13.0 3 4.6 5.8 5.0 4 -2.6 -6.8 -4.0 5 10.2 15.6 12.0 6 5.4 7.2 6.0 Average Sx Even though you really don't have enough observations, you decide to calculate the expected (average) return, the (sample) standard deviation of return, Sx, and the beta, j, for each security (Show and/or explain your work). Now you decide see what would happen if you formed a portfolio consisting of 30% of stock A and 70% of stock B. Place the expected portfolio returns in the following table and calculate the expected (average) portfolio return, the portfolio (sample) standard deviation of return, Sp, and the portfolio beta, Bp. Period 1 Portfolio Market 10.0% 2 13.0 3 5.0 4 -4.0 5 12.0 6 6.0 Average Sx Same as above Same as above Same as above You may use the * key to find the average, the standard deviation and the beta (it is the gold m under the number "5" key). Or, you may use Excel to perform a regression of the stock, or portfolio, returns on the market returns. Just show, or explain, your work. Finally, use the following formulas, and your work above, to determine: a. The expected return on the portfolio: E(Rp) = WAX E(RA) + WB X E(RB); b. The beta of the portfolio: B = WAX BA + WB X B; and c. The portfolio standard deviation: S = (WA 2 SA + WB X SB + 2W AWB X COVAB) 1/2. X (you will have to calculate the (sample) covariance -- make sure to divide by N-1 = 5)
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