Question

5. Calculate the coefficient of determination (Rsquared) for the above portfolio 6. What does the coefficient of determination tell us? 7. What is the beta of the above portfolio? 8. What is the expected return on ZYX stock given the following: Return on the market 8% Beta 1.3 Treasury bill rate 2.5% 9. What is the expected return on CBA stock given the following: Beta .5 Risk free rate 3.1% Return on the market 15.7% 10. What is the expected return on a portfolio given the following: SD of the portfolio 12 SD of the market 19 Risk free rate 2.79 Return on the market 11.9% Beta of the portfolio .8

Answer 1

1) Expected Return = wa x Ra + wb x Rb = 60% x 10% + 40% x 16% = 12.40%

2) Std. Dev. = [(w1 x SD1)^2 + (w2 x SD2)^2 + (2 x w1 x w2 x SD1 x SD2 x corr12)]^(1/2)

= [(60% x 6%)^2 + (40% x 12%)^2 + (2 x 60% x 40% x 6% x 12% x -0.4)]^(1/2)

= 4.71%

3) Yes it does. You are getting returns better than A and with volatility too less than A.

4) CoV for A = SD / Return = 6% / 10% = 0.6 and

for B, CoV = 12% / 16% = 0.75