Question

A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the investor’s expected rate of return.

Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio.

Consider the following case:

Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table:

Stock

Percentage of Portfolio

Expected Return

Standard Deviation

Artemis Inc.

20%

6.00%

37.00%

Babish & Co.

30%

14.00%

41.00%

Cornell Industries

35%

12.00%

44.00%

Danforth Motors

15%

5.00%

46.00%

What is the expected return on Andre’s stock portfolio?

13.97%

7.76%

15.52%

10.35%

Suppose each stock in Andre’s portfolio has a correlation coefficient of 0.40 (ρ = 0.40) with each of the other stocks. The market’s average standard deviation is approximately 20%, and the weighted average of the risk of the individual securities in the partially diversified four-stock portfolio is 42%.

If 40 additional, randomly selected stocks with a correlation coefficient of 0.30 with the other stocks in the portfolio were added to the portfolio, what effect would this have on the portfolio’s standard deviation (σpp)?

It would gradually settle at about 35%.

It would gradually settle at approximately 50%.

It would stay constant at 42%.

It would gradually settle at approximately 20%.

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General Copy Fill в IU- Merge & Center Insert Delete Format Paste +.0 .00 .00 0 Conditional Format Cell Sort & Find & % Format Painter Clear Filter Select Formatting as Table Styles Number Clipboard Font Alignment Styles Cells Editing fx F286 E F G Н K L 269 270 271 WEIGHTS 272 RETURN WEIGHTED RETURN 273 A A*B 274 ARTEMIS 20% 6% 1.20% 275 ВABISH 30% 14% 4.20% 276 CORNELL 12% 4.20% 35% 277 DANFORTH 15% 5% 0.75% 278 279 ANSWER: EXPECTED RETURN ON PORTFOLIO = 10.35% 280 281 ANSWER: IT WOULD GRADUALLY SETTLE AT APPROXIMATELY AT 20% 282 283 AS NO OF STOCKS ARE ADDED WITH LOWER CORRELATION COEEFICIENT, RISK WILL REDUCE 284 AND THAT WILL APPROXIMATE TO MARKET RISK 285 286 287 DGM beta YIELD bond portfolio LEASING PV, FV, ANNUITY clean КЕ САРМ port future INDEX RESI eI KE CAPM UTILITY, SHARPE, beta DIR right cONvexity INTL CAP BUD cap stru WACC Rea erences: AG470 130% WA 01:25 ENG 20-11-2019