Question

17 How do margin trades magnify both the upside potential and the downside risk of an investment position? 18.What do you think would happen to the expected return on stocks if investors perceived higher volatility in the equity market? 评阅人 得分 IV. Calculation.(10 points each, 30points) The following are estimates for two stocks. Stock Expected Return Beta Firm-Specific Standard Deviation 0.8 30% b 13% A 1.2 40 18 The market index has a standard deviation of 22% and the risk-free rate is 8%. a. What are the standard deviations of stocks Aand B? b.Suppose that we we re to construct a portfolio with proportions: .30 Stock A: Stock B: 25 45 T-bills: Compute the expected return, standard deviation, beta, and nonsystematic standard deviation of the portfolio.C86 第2页(共2页)

Answer 1

18)By allowing an investor to invest more than their money to allow.

If we have great amount of capital ,if the stock price rises we can achieve more upside potential .

Here it is risky to do that because here we the investors are taking an huge risk if we loss we have to pay back the principle amount and the interest of the amount we borrowed in the stock.