Question

1. The Canadian Musician/Artist Aubrey Drake Graham, known by his stage name “Drake“ has invested 70% of his money in share A and the remainder in share B. He assesses their prospects as follows:

	A		B
Expected return (%)	13		19
Standard deviation (%)	19		21
Correlation between returns		.3

           

1. What are the expected return and standard deviation of returns on this two share portfolio? (Do not round intermediate calculations. Set your answers to four decimal places please.)

Note: For a two stock portfolio:

E(R_p)= r_p = x₁r₁ + x₂r₂

s_p² = x₁²s₁² + x₂²s₂² +2x₁x₂ r₁₂ s₁s₂ =

Answers:

Expected return = =E (weight) *expected return

Variance =

Standard deviation =

2. How would your answer change if the correlation coefficient were 0 or –.3? Does this affect the portfolio level of risk, if so, how? (Round your answers to 2 decimal places.)?

1. Correlation coefficient =                        Standard deviation =
2. Correlation coefficient =                        Standard deviation =

3. Is Drake’s portfolio better or worse than one invested entirely in share A, or is it possible to determine? Head’s UP Please.

2. The Treasury bill rate is 3% (r_f) and the expected return on the market portfolio is 13% (r_m). Using the capital asset pricing model with the aforementioned assumptions regarding risk free rate and market rate to answer the following questions:

1. Draw a graph similar to Figure 8.7 (found on p. 208, within chapter 8 of our textbook) showing how the expected return varies with beta.

r_f will start at 3% and 0 beta, for market, r_m of .13 and beta of 1.0

See Next Page Please

Answer 1

Answer - A. Expected of portfolio Redum = Weight in x Effeeled rekorn StekA in stock A t weight in expected return stolk B in Stocks 0.70 X 13% - 0630x19% Variance (62) = Schox wat schoot we? where f2 sdsd BX WA XWRX X (A,B) sd = Standard deviation or comelation - 0.19 x 0.22 0.21 x 032 + 2x 0.19 X 0.21 X 007 X03X 003 = 0.017689 + 0,003969 + 0.0050274 = 0.0266854 or 0.8 267 approna Standard devication a Juariance 52.0 = 100266854 = 0/634

If comelation would be o then standard daration will change but expected setorn would a romain same. 0,192x0,727 0.21220032 V + 2X0, 1980.21 X OptX003 XO ✓ 0,017689 + 0.003969 a J 0, 021658 = 0.1472 approx. Id correlation would be - 0,3 then o will change bell experled return would remain sine. r-10,192x0,724 0212X082 0,19 2₂0 22+ 0.21 2x0.3 + 2 x 0,1980.21 X0,7 XO3X (-0.3) 0,019 689 + 0.003964 - 0.0050274 - j 0,0166386 0013 approx

C If enested Share A, whole tuon money ein Expeeled rehorna 13% Standard deviation - 1911 would get than portfolio of werse en twis Drake call.