Question

You have estimated the following probability distribution of returns for two stocks: Stock N Stock O Probability 0.20 0.30 Return 8% Probability 0.20 0.30 0.30 Return 26% 12 0.30 0.20 -4 0.20 -4 Calculate the expected rate of return and standard deviation for cach stock If the correlation between the returns on the two stocks is -0.40, calculate the portfolio returm and the standard deviation for portfolios containing 100%, 75 % , 50 % , 25 % and 0 % of security N, respectively Plot the results from b). Which portfolios lie on the efficient frontier? If there is no risk-free asset, which portfolio would you prefer? Why? Would other individuals necessarily choose the same portfolio? a. b.
letter b please

Answer 1

B Α 1 Stock N 2 probability D Stock O probability 3 return 0.2 0.08 0.3 0.04 0.3 0 0.2 -0.04 return 0.2 0.26 0.12 0.3 0 0.2 -0.04 0.3 7 8 a) Stock N Stock O 9 expected return 2.00% 8.00% 10 standard deviation 4.10% 10.84% 11 12 b) 13 correlation -0.4 14 % in portfolio 15 stock N stock o Expected return standard deviation 1 0 2.00% 4.10% 17 0.75 0.25 3.50% 3.18% 18 0.5 0.5 5.00% 4.97% 19 0.25 0.75 6.50% 7.78% 20 1 8.00% 10.84% 21 22 16 0 23

А 1 Stock N 2 probability 3 0.2 4 0.3 5 0.3 60.2 return 0.08 0.04 Stock O probability 0.2 0.3 0.3 return 0.26 0.12 -0.04 -0.04 8 a) 9 expected return 10 standard deviation Stock N =SUMPRODUCT(A3:A6,B3:36) =SQRT((A3*((B3-B9)^2))+(A4*((B4-B9)^2))+(A5*((B5-B9)^2))+(A6*((B6-B9)^2))) Stock O =SUMPRODUCT(D3:D6, E3:E6) =SQRT (D3*((E3-C9)*2))+(D4*((E4-C9)^2))+(D5*((E5-C9)*2))+(D6*((E6-C9)^2))) 11 -0.4 12 b) 13 correlation 14 % in portfolio 15 stock N 16 1 17 0.75 18 0.5 19 0.25 200 21 stock o =1-A16 =1-A17 =1-A18 =1-A19 =1-A20 Expected return =(SUMPRODUCT(A16:B16,$B$9:$C$9)) =(SUMPRODUCT(A17:B17,$B$9:$C$9)) =(SUMPRODUCT(A18:B18,$B$9:$C$9)) =(SUMPRODUCT(A19:319,$B$9:$C$9)) =(SUMPRODUCT(A20:B20,$B$9:$C$9)) standard deviation =SQRT(((A16*$B$10)^2)+((B16*$C$10)^2)+(2*A16*B16*$B$13*$B$10*$C$10)) =SQRT(((A17"$B$10)^2)+((B17*$C$10)^2)+(2*A17*B17"$B$13"$B$10"$C$10)) =SQRT(((A18*$B$10)^2)+((B18*$C$10)^2)+(2*A18*B18*$B$13"$B$10$C$10)) =SQRT(((A19"$B$10)^2)+((B19*$C$10)^2)+(2*A19*B19"$B$13"$B$10*$C$10)) =SQRT{(A20*$B$10)^2)+((B20*$C$10)^2)+(2*A20*B20*$B$13*$B$10*$C$10))