1. Calculate the expected return and standard deviation of a portfolio that is 80% Large Cap Stocks and 20% Corporate Bonds. Show your work. The expected return on Large Cap Stocks is 12% with a standard deviation of 20%. The expected return on Corporate Bonds is 6% with a standard deviation of 8%. The correlation between Large Cap stocks and corporate bonds is 0.17. SHOW YOUR WORK FOR ALL THE QUESTIONS. 2. Using the data in Question #1, calculate the Minimum Variance Portfolio (MVP) weights for a 2- asset portfolio of Large Cap Stocks and Corporate Bonds.

1. Calculate the expected return and standard deviation of a portfolio that is 80% Large Cap Stocks and 20% Corporate Bonds. Show your work. The expected return on Large Cap Stocks is 12% with a standard deviation of 20%. The expected return on Corporate Bonds is 6% with a standard deviation of 8%. The correlation between Large Cap stocks and corporate bonds is 0.17. SHOW YOUR WORK FOR ALL THE QUESTIONS. 2. Using the data in Question #1, calculate the Minimum Variance Portfolio (MVP) weights for a 2- asset portfolio of Large Cap Stocks and Corporate Bonds.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6P

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(4) Please answer the following short questions with what you have learned. There is a portfolio of two assets - 30% investment in Stock A and 70% investment in Stock B. The correlation of returns between Stock A and Stock B is 0.50. The covariance between these two stocks is 0.0043, and the standard deviation of the return of Stock B is 26%. Requirements: (a) Please calculate the standard deviation of the return of Stock A. (b) Please calculate the standard deviation of the return of portfolio. (c) If we increase more and more different stocks in the portfolio, will it always decrease the risk (standard deviation) of the return of the portfolio? Please explain your answer in detail.
In-class Example 4: Portfolio Risk Return Suppose that a portfolio of stocks has an expected return E(rS) = 12% and a standard deviation of returns sS = 20%. A portfolio of corporate bonds has an expected return E(rB) = 6% and a standard deviation sB = 9%. a) What is the expected portfolio return and portfolio standard deviation for an equally weighted combination of the stock and bond portfolio if the correlation between stock and bond portfolio returns, rSB, is -0.5? b) Suppose you require a portfolio expected return of 15% per year. What weights must you assign to the stock and bond portfolios to achieve this expected return? What is the standard deviation of returns for this combination portfolio if the correlation between stock and bond returns is -0.5? C) Suppose that the standard deviation of the market (sM) is 15% and the correlation between the stock portfolio and the market is 0.7. What is the beta of the stock portfolio?
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