PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 7, Problem 25PS
Portfolio risk Here are some historical data on the risk characteristics of Ford and Harley Davidson:
Assume the standard deviation of the return on the market was 9.5%.
- a. The correlation coefficient of Ford’s return versus Harley Davidson is 0.30. What is the standard deviation of a portfolio invested half in each share?
- b. What is the standard deviation of a portfolio invested one-third in Ford, one-third in Harley Davidson, and one-third in risk-free Treasury bills?
- c. What is the standard deviation if the portfolio is split evenly between Ford and Harley Davidson and is financed at 50% margin, that is, the investor puts up only 50% of the total amount and borrows the balance from the broker?
- d. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.26 like Ford? How about 100 stocks like Harley Davidson? [Hint: Part (d) should not require anything but the simplest arithmetic to answer.]
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Here are some historical data on the risk characteristics of Ford and Harley Davidson.
Harley
Davidson
Ford
B (beta)
Yearly standard deviation of return (%)
1.26
0.67
30.6
15.8
Assume the standard deviation of the return on the market was 13.0%
a. The correlation coefficient of Ford's return versus Harley Davidson is 0.39. What is the standard deviation of a portfolio invested half
in each share?
b. What is the standard deviation of a portfolio invested one-third in Ford, one-third in Harley Davidson, and one-third in risk-free
Treasury bills?
c. What is the standard deviation if the portfolio is split evenly between Ford and Harley Davidson and is financed at 50% margin, that
is, the investor puts up only 50% of the total amount and borrows the balance from the broker?
d-1. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.26 like Ford?
d-2. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of…
Here are some historical data on the risk characteristics of Ford and Harley Davidson.
Ford
Harley Davidson
β (beta)
1.43
0.75
Yearly standard deviation of return (%)
33.3
16.9
Assume the standard deviation of the return on the market was 12.0%.
a. The correlation coefficient of Ford’s return versus Harley Davidson is 0.38. What is the standard deviation of a portfolio invested half in each share?
b. What is the standard deviation of a portfolio invested one-third in Ford, one-third in Harley Davidson, and one-third in risk-free Treasury bills?
c. What is the standard deviation if the portfolio is split evenly between Ford and Harley Davidson and is financed at 50% margin, that is, the investor puts up only 50% of the total amount and borrows the balance from the broker?
d-1. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.43 like Ford?
d-2. What is the approximate standard deviation of a portfolio composed of…
Based on the following information, calculate the expected return and standard deviation for
each of the following stocks. What are the covariance and correlation between the returns of
the two stocks? Calculate the portfolio return and portfolio standard deviation if
you invest
equally in each asset.
Returns
State of Economy
Prob
J
K
Recession
0.25
-0.02
0.034
Normal
0.6
0.138
0.062
Boom
0.15
0.218
0.092
Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
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Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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