Question

Use the data provided below to answer the following questions: 0.50 WEIGHTS 0.50 HomeChef PORTFOUO Market Bake Date Year 0.26 0.15 -0.14 -0.15 0.02 -0.18 0.42 0.30 0.47 -0.54 0.37 1 0.07 2 -0.20 0.18 0.15 0.07 -0.28 0.40 0.00 0.22 -0.04 -0.14 0.10 0.26 -0.13 6 0.11 0.17 -0.23 0.30 8 0.30 -0.10 0.04 -0.03 0.38 -0.32 -0.18 -0.04 0.28 0.0640 0.2390 0.75 10 0.52 avg stdev 0.0800 0.0920 0.0780 0.2295 0.1908 0.3660 CV 3.978 2.386 3.734 2.9429 НС ВD MRK BD MRK HC CORRELATION 0.4812 0.6783 0.1125 0.6027 BETA HC BETA BD 1.3009 1 BETA Market 0.9518 BETA Portfolio 0.04 Trf RPM 0.05 0.0876 0.1050 0.0900 CAPM 0.0701 What measure is used to select companies for a nortfolio? Which value should be used (i.e. which combination of two assets) should be used for constructing a portfolio? 8.

Answer 1

Answer 8) A portfolio is combination of multiple stocks together for minimization of risk. The measures to be used to select companies or stocks are:

• Return of stock
• Risk factor ( standard deviation)
• Correlation between shares
• weight ( proportion ) of shares in portfolio

The value to be used for portfolio are , standard deviation , return , and correlation factors.

Answer 9)The portfolio has major benefit by risk minimization , indicated by standard deviation and beta of portfolio.

Answer 10) Beta indicate the systematic risk for stock. This is indicator of risk of a particular stock in relation to the volatility of the index of stock market.

Beta $\beta =\frac{Cov(R_s,R_m)}{Var(R_m)}$

Beta= Correlation (R_s, R_m) * σ_s / σ_m.

_{Answer 11)} CAPM (capital Asset Pricing Model) a asset pricing model established a detailed relationship between systematic risk and expected return for assets.The model is mainly used to price the stock or any other risky securities by generating expected returns for assets at given risk level.

Answer 12)

As CAPM

Expected return = Risk Free rate + Beta *( Market Return - Risk Free rate)

$E(r)=R_f+\beta *(R_m-R_f)$.