Teena is considering investing in Stock A and stock B. She plans to invest $ 25,000 in the low risk stock and $ 50,000 in the high-risk stock. You have been given the following information about these two stocks in the table below: Stock A B E(R) 15% 10 ? 25% 22% Correlation between A and B 0.20 Based on the given information above, you are required to: i. Calculate the portfolio weights ii. Calculate the portfolio return. iii. Calculate the portfolio risk. iv. Compare portfolio risk with the individual stock risks and identify the benefit of the diversification of the portfolio.
Teena is considering investing in Stock A and stock B. She plans to invest $ 25,000 in the low risk stock and $ 50,000 in the high-risk stock. You have been given the following information about these two stocks in the table below: Stock A B E(R) 15% 10 ? 25% 22% Correlation between A and B 0.20 Based on the given information above, you are required to: i. Calculate the portfolio weights ii. Calculate the portfolio return. iii. Calculate the portfolio risk. iv. Compare portfolio risk with the individual stock risks and identify the benefit of the diversification of the portfolio.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Teena is considering investing in Stock A and stock B. She plans to invest $ 25,000 in the low risk stock and $ 50,000 in the high-risk stock. You have been given the following information about these two stocks in the table below:
Stock
A
B
E(R)
15%
10
?
25%
22%
Correlation between A and B
0.20
Based on the given information above, you are required to:
i. Calculate the portfolio weights
ii. Calculate the portfolio return.
iii. Calculate the portfolio risk.
iv. Compare portfolio risk with the individual stock risks and identify the benefit of the diversification of the portfolio.
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