Question

The following are estimates for two stocks.

Stock	Expected Return			Beta	Firm-Specific Standard Deviation
A		10	%	0.70		28	%
B		18		1.25		42

The market index has a standard deviation of 22% and the risk-free rate is 7%.

a. What are the standard deviations of stocks A and B? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Suppose that we were to construct a portfolio with proportions:

Stock A	0.35
Stock B	0.35
T-bills	0.30

Compute the expected return, standard deviation, beta, and nonsystematic standard deviation of the portfolio. (Do not round intermediate calculations. Enter your answer for Beta as a number, not a percent. Round your answers to 2 decimal places.)

Expected return?%

Standard Deviation?%

Beta?

Nonsystematic standard deviation?%

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

A e * 9 w (2 v . * ENG 02-25 03-03-2020 26 KQ245 KL X KM fix KN ko KP KQ KR KS KT KU KV KW KK Ka 245 246 247 248 249 variance for stock A = ((beta)^2* (variance of market)) + standard deviation of error term^2 ((0.70)^2*((22)^2) + (28)^2 = 1021.16 250 variance for stock B = ((beta)^2*(variance of market)) + standard deviation of error term^2 ((1.25)^2*((22)^2)+(42)^2 = 2520.25 252 standard deviation for A SD(A) = SQRT(VARIANCE) = 31.96% [sqrt(1021.16)] standard deviation for B SD(B) = SQRT(VARIANCE) = 50.20% (sqrt(2520.25)] 256 257 258 expected return on portfolio = W(A)*E(A) + W(B)*E(TB) + W(f) *Rf 0.35*10% +0.35*18% +0.30*7% = 11.90% 259 260 261 beta of the portfolio = 262 W(A)*bA+W(B)*bB+ W(f) *bf 0.35*0.70 + 0.35*1.25 +0.30*0 = [risk free security has zero beta] 0.6825 = 0.68 263 variance of the portfolio = 264 265 266 267 268 systematic component nonsystematic component ((beta of portfolio)^2*(variance of market)) + W (A)*6-(CA) + W (B)*64(eB) + W4(f) *6 (rf) (0.6825^2)*(2242) + (0.35^2)*(28^2)+(0.35^2)*(42^2) + (0.30-2)*(0) 225.450225 312.13 537.580 DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... KE CAPM UTILITY, SHARPE, beta coNvexity :

(2 v . * ENG 02-25 03-03-2020 26 . KQ286 KL x KM fix KN KO KP KQ KR KS KT KU KV KW KX K- 263 264 variance of the portfolio = 265 266 267 systematic component + nonsystematic component ((beta of portfolio)^2* (variance of market)) + W (A)*64(EA) + W2(B)*62(eB) + W4(f) *6 (rf) (0.6825^2)* (2212) + (0.35^2) * (28^2)+(0.35^2)*(42^2) + (0.30^2)*(0) 225.450225 312.13 537.580 268 269 270 standard deviation of portfolio = sqrt(variance of portfolio) = 23.19 (sqrt(537.580)] 271 272 273 nonsystematic standard deviation = 274 17.67 sqrt(nonsystematic component) (sqrt(312.13)] 275 276 answers expected return standard deviation beta nonsystematic standard deviation = 11.90% 23.19% 0.68 17.67% 279 280 282 284 285 286 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... :