6. Stock A and B have expected return and standard deviation respectively as follow Stock Expected return Standard deviation A 11% 13% В 23% 18% Correlation between A andB=0.45 Risk-free rate = 4% a) Which portfolio should be invested if investor is considering between Risky portfolio 1 (30% in stock A and 70% in stock B) and portfolio 2 (25% in stock A and 75% in stock B) b) If Investor add a risk-free asset C with a return of 5% into the risky portfolio that was choosed in part (a) to form a complete portfolio. What should the optimal proportions of risky portfolio and risk-free asset for an investor whose degree of risk aversion is 3. c) Calculate the expected return and standard deviation of the complete portfolio
6. Stock A and B have expected return and standard deviation respectively as follow Stock Expected return Standard deviation A 11% 13% В 23% 18% Correlation between A andB=0.45 Risk-free rate = 4% a) Which portfolio should be invested if investor is considering between Risky portfolio 1 (30% in stock A and 70% in stock B) and portfolio 2 (25% in stock A and 75% in stock B) b) If Investor add a risk-free asset C with a return of 5% into the risky portfolio that was choosed in part (a) to form a complete portfolio. What should the optimal proportions of risky portfolio and risk-free asset for an investor whose degree of risk aversion is 3. c) Calculate the expected return and standard deviation of the complete 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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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:6. Stock A and B have expected return and standard deviation respectively as
follow
Stock
Expected return
Standard deviation
A
11%
13%
B
23%
18%
Correlation between A and B= 0.45
Risk-free rate = 4%
%3D
a) Which portfolio should be invested if investor is considering between Risky
portfolio 1 (30% in stock A and 70% in stock B) and portfolio 2 (25% in
stock A and 75% in stock B)
b) If Investor add a risk-free asset C with a return of 5% into the risky portfolio
that was choosed in part (a) to form a complete portfolio. What should the
optimal proportions of risky portfolio and risk-free asset for an investor
whose degree of risk aversion is 3.
c) Calculate the expected return and standard deviation of the complete
portfolio
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