Question 3 a) You intend to construct a 2-asset portfolio. Three stock candidates are available with the following probability distribution of their returns: Return on Return on Return on Probability Stock X Stock Y Stock Z (%) 5 (%) 6 (%) 10 0.35 0.4 9 9 12 0.25 4 14 How many 2-asset portfolio combinations can be created? Provide their names. Compute the covariance between the returns of various stock combinations Provide an estimate of correlation between returns of various stock combinations Which stocks emerges as the most ideal candidates to be held as a portfolio? Why? b) “There is no alpha in an efficient market". In light of this statement, briefly describe market efficiency and its forms and why an investor may not be able to locate stocks that provide a positive alpha (undervalued stocks) consistently. (150 – 200 words)

Question 3 a) You intend to construct a 2-asset portfolio. Three stock candidates are available with the following probability distribution of their returns: Return on Return on Return on Probability Stock X Stock Y Stock Z (%) 5 (%) 6 (%) 10 0.35 0.4 9 9 12 0.25 4 14 How many 2-asset portfolio combinations can be created? Provide their names. Compute the covariance between the returns of various stock combinations Provide an estimate of correlation between returns of various stock combinations Which stocks emerges as the most ideal candidates to be held as a portfolio? Why? b) “There is no alpha in an efficient market". In light of this statement, briefly describe market efficiency and its forms and why an investor may not be able to locate stocks that provide a positive alpha (undervalued stocks) consistently. (150 – 200 words)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13QTD

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You intend to construct a 2-asset portfolio. Three stock candidates are available with the following probability distribution of their returns in the picture below. a) How many 2-asset portfolio combinations can be created? Provide their names.b) Compute the covariance between the returns of various stock combinationsc) Provide an estimate of correlation between returns of various stock combinationsd) Which stocks emerges as the most ideal candidates to be held as a portfolio? Why?
which one is correct? QUESTION 6 Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is known as the a. efficient frontier. b. utility curve. c. last frontier. d. efficient portfolio. e. capital asset pricing model.
i) Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.
2. (a) You have a two-asset portfolio that comprises Stock PY and Stock NY with the following information: Proportion of Stock PY in the portfolio Proportion of Stock NY in the portfolio Standard deviation of Stock PY's returns Standard deviation of Stock NY's returns 48% 52% 3% 5% Calculate the standard deviation if the correlation coefficient of returns between both stocks is 0.15.
Compute the portfolio risk if stock A and Stock B are combined in a portfolio in the ratio 6:4 respectively.
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Step by step explaination (use attached diagram) This question relates to Diagram 6 from the diagrams, which shows the probability distributions of returns for Shares N, P and Q. In which share would a risk-averse investor be most likely to invest? Select one: a. Share N b. Share P c. Share Q d. We need more information about the investor's risk tolerance to determine which share the investor would prefer.
a) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk- return characteristics of a portfolio consisting of only stocks A and B, and explain why? E(R) E(R) E(R) A A A (A) (B) (C) b) found to be half of the required return (Rs) on stock B. The risk-free rate (R) is one-fourth of the required Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (DA) to beta of B (OB). c) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with…
The following questions are based on the given information from table of probabilitydistributions of returns on investment individual shares and portfolio below:Table 3: Probability distributions of returns on investment for individual shares and portfolio. State ofEconomy Probabilityof theStates Return onShare A(rA) Return onShare B(rB) Return on Portfolio AB(rAB)1 0.20 15% -5% 5%2 0.20 -5% 15% 5%3 0.20 5% 25% 15%4 0.20 35% 5% 20%5 0.20 25% 35% 30% Given: By using the above information, demonstrate the rate of risk (variance and standarddeviation) for each of:(i) Share A (ii) Share B (iii) Portfolio A and B
Q1) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why? (Image attached as Q)
Stocks A and B have the following data. Assuming the stock marketyls efficient and the stocks are in equilibrium, which of the following statements is CORRECT? \table[[,A,B
a) Share X and Share Y have the following returns with their respective probabilities. Share X Share Y Return Probability Return Probability 10% 0.3 15% 0.35% 0.31% 0.4-4% 0.4-10% 0.3 Calculate the following: i) The expected rate of returns for both shares. ii) The standard deviation for both shares. ii) On a stand-alone basis, select which stock is the riskier..