Question

Your client has $96,000 invested in stock A. She would like to build a two-stock portfolio by investing another $96,000 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? A Expected Return 17% 14% 14% Standard Deviation 50% 38% 38% Correlation with A 1.00 0.13 0.31 B C The expected return of the portfolio with stock B is %. (Round to one decimal place.)

Answer 1

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C w ENG 08:08 23-07-2020 99+ 30 Х LN1392 X . LM LN LO LP LQ LR LS LT LU STOCK A AND STOCK B WA = 50.00% RA = 17.00% 14.00% WB = 50.00% RB= EXPECTED RETURN ON PORTFOLIO E(Rp): E(Rp) = WA*RA + WB*RB = 50%*(17%) + 50%(14%) = 15.5% STANDARD DEVIATION OF THE PORTFOLIO 1373 1374 1375 1376 1377 1378 1379 1380 1381 ANS 1 1382 1383 1384 1385 1386 1387 1388 1389 ANS 2 1390 1391 1392 1393 1394 1395 1396 ra SDA = 50.00% 0.13 SDB = 38.00% PORTFOLIO SD = SQRT ((WA)^2*(SDA)^2 + (WB)^2*(SDB)^2 + 2 WA*WB*(SDA)*(SDB)* (r )) PORTFOLIO SD = SQRT ((50%)^2*(50%)^2 + (50%)^2*(38%)^2 + 2 *50%*50%*(50%)*(38%)* (0.13)) PORTFOLIO SD = 33.31% [rounded to 2 decimals] + capm-portfolio RAK ROE Sheet7 DIVERSIFIED retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV std co: ... +

C w ENG 08:10 23-07-2020 99+ 30 Х LN1422 . LM LN LO LQ LR LS LT LU STOCK A AND STOCK C RA = WA = WC = 50.00% 50.00% 17.00% 14.00% RC= EXPECTED RETURN ON PORTFOLIO E(Rp): E(Rp) = WA*RA + WC*RC = 50%*(17%) + 50%(14%) = 15.5% STANDARD DEVIATION OF THE PORTFOLIO 1400 1401 1402 1403 1404 1405 1406 1407 ANS 3 1408 1409 1410 1411 1412 1413 1414 1415 ANS 4 1416 1417 1418 1419 ANSWER r= SDA = 50.00% 0.31 SDC = 38.00% PORTFOLIO SD = SQRT ((WA)^2*(SDA)^2 + (WC)^2*(SDC)^2 + 2 WA*WC*(SDA)*(SDC)* (r)) PORTFOLIO SD = SQRT (50%)^2* (50%)^2 + (50%)^2*(38%)^2 + 2 *50%*50%*(50%)*(38%)* (0.31)) PORTFOLIO SD = 35.78% [rounded to 2 decimals] ADD STOCKB RETURNS ARE SAME FOR BOTH PORTFOLIOS BUT RISK IS LOWER WITH STOCK B 1420 1421 1422 1423 capm-portfolio RAK ROE Sheet7 DIVERSIFIED retirement futures margin PV, FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV std co: ... +