Question

Suppose the correlation coefficient between the rates of return on ABC Mutual Fund and the market portfolio is 0.6. The standard deviations of the rates return are 0.30 for ABC and 0.20 for the market portfolio. How would you combine the fund and the riskless asset to obtain a portfolio with a relative systematic risk (beta) of 0.7? What is your weight on the fund?

Answer 1

0.6 Given → Correlation betwen Fund mec & Market Portfolio Srem)= → Standasd deviation of Fund (T) = 0.30 → Standard deviation of Market [um] = 0.20 STEP 1: Compute Beta of Fund. Beta fond Sex Yem OM = 0.30 x 0.6 0.20 = 0.9 STEP 2: Calculate Weight of Fund (WF]. the FORMULA to calculate Beta of Portfolio when one Asset is Risky and othes is Risk-free is : Desired beta = Weight rund * Beta fund 0.7 = We x 0.9 Wp = 0.7 0.9 - 0.78 77.78 A

Answer 2

Q2. The following are the monthly rates of return for RTL. Corp. and for KEL. Corp. during a six-month period. Month RTL Corp. KEL. Corp -0.04 0.07 0.06 -0.02 -0.07 -0.10 4 0.12 0.15 -0.02 -0.06 6 0.05 0.02 Compute the following: a. Expected (average) monthly rate of return [E(Ri)] for each stock. b. Standard deviation of returns for each stock. C. The covariance between the rates of return. d. The correlation coefficient between the rates of return. Would these two stocks offer a good chance for diversification? Why or why not?