Question

Your client has $102,000 invested in stock A. She would like to build a two-stock portfolio by investing another $102,000 in either stock B or C. She wants a portfolio with an expected return of at least 15.5% and as low a risk as possible, but the standard deviation must be no more than 40%. What do you advise her to do, and what will be the portfolio expected return and standard deviation? Expected Return Standard Deviation Correlation with A 49% 37% 0.14 37% 1.00 0.32 The expected return of the portfolio with stock Bis %. (Round to one decimal place.) rrect

Answer 1

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v o (. 1x E3 ENG - 04:21 28-03-2020 23) ... X LO1372 : X fix LL LM LN LO LP LQ LR LS LT LU 1372 1373 1374 1375 1376 RA = WA = WB = 50.00% 50.00% 17.00% 14.00% RB= EXPECTED RETURN ON PORTFOLIO E(Rp): ANS 1 E(Rp) = WA*RA + WB*RB = 50%*(17%) + 50%(14%) = 1377 1378 1379 1380 1381 1382 1383 1384 1385 1386 15.5% STANDARD DEVIATION OF THE PORTFOLIO 1387 SDA = 49.00% 0.14 SDB = 37.00% PORTFOLIO SD = SQRT ((WA)^2*(SDA)^2 + (WB)^2* (SDB)^2 + 2 WA*WB*(SDA)*(SDB)* (r )) PORTFOLIO SD = SQRT ((50%)^2*(49%)^2 + (50%)^2* (37%)^2 + 2 *50%*50%*(49%)*(37%)* (0.14)) PORTFOLIO SD = 32.70% [rounded to 2 decimals] 1388 1389 ANS 2 1390 1391 1392 1393 1394 1395 1200 capm-portfolio retirement futures marginPV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV RAK ROE std costing EPS%, ECONOMY ... + 7

voca Jx 2 ENG , - 04:23 28-03-2020 23 ... o X LN1423 for LL x = LM L N LO LP LQ LR LS LT LU A 1400 WA = RA= 50.00% 50.00% 17.00% 14.00% WC = RC= EXPECTED RETURN ON PORTFOLIO E(Rp): ANS 3 E(Rp) = WA*RA + WC*RC = 50%*(17%) + 50%(14%) = 15.5% STANDARD DEVIATION OF THE PORTFOLIO r = 1401 1402 1403 1404 1405 1406 1407 1408 1409 1410 1411 1412 1413 1414 1415 1416 1417 1418 1419 1420 1421 1422 1423 SDA = 49.00% 0.32 SDC = 37.00% PORTFOLIO SD = SQRT ((WA)^2*(SDA)^2 + (WC)^2*(SDC)^2 + 2 WA*Wc*(SDA)* (SDC)* (r)) PORTFOLIO SD = SQRT ((50%)^2*(49%)^2 + (50%)^2*(37%)^2 + 2 *50%*50%*(49%)*(37%)* (0.32)) PORTFOLIO SD = 35.11% [rounded to 2 decimals] ANS 4 ANSWER ADD STOCK B RETURNS ARE SAME FOR BOTH PORTFOLIOS BUT RISK IS LOWER WITH STOCK B capm-portfolio retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV RAK ROE std costing EPS%, ECONOMY ... + 7