PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 8, Problem 6PS
Portfolio risk and return* Ebenezer Scrooge has invested 60% of his money in share A and the remainder in share B. He assesses their prospects as follows:
- a. What are the expected return and standard deviation of returns on his portfolio?
- b. How would your answer change if the correlation coefficient were 0 or –.5?
- c. Is Mr. Scrooge’s portfolio better or worse than one invested entirely in share A, or is it not possible to say?
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Ebenezer Scrooge has invested 50% of his money in share A and the remainder in share B. He assesses their prospects as follows:
A
B
Expected return (%)
15
21
Standard deviation (%)
22
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Correlation between returns
0.6
a. What are the expected return and standard deviation of returns on his portfolio? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
b. How would your answer change if the correlation coefficient were 0 or –0.60? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
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(b) Suppose that Jerry Tan has surplus funds to invest in both stocks, Alpha and Beta. He has decided to form a portfolio with investment in both stocks. The correlation coefficient between the expected return of both stocks is 0.8 and the weightage of investment is 40% for Stock Alpha and 60% for Stock Beta.
Required:(i) Compute the expected return, Standard Deviation and Variance of the portfolio.
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Assuming you are an investor with GHS100 available. If you invest GHS60 and GHS40 in Allos Inc. and Orangus Inc. respectively, what will be your portfolio returns?
4.Calculate the Standard deviation of the portfolio.
Chapter 8 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 8 - Efficient portfolios For each of the following...Ch. 8 - Efficient portfolios Figure 8.11 purports to show...Ch. 8 - Portfolio risk and return Look back at the...Ch. 8 - Portfolio risk and return Mark Harrywitz proposes...Ch. 8 - Portfolio risk and return Ebenezer Scrooge has...Ch. 8 - Portfolio risk and return Here are returns and...Ch. 8 - Portfolio risk and return Percival Hygiene has IO...Ch. 8 - Sharpe ratio Use the long-term data on security...Ch. 8 - Portfolio beta Refer to Table 7.5. a. What is the...Ch. 8 - CAPM True or false? Explain or qualify as...
Ch. 8 - CAPM True or false? a. The CAPM implies that if...Ch. 8 - CAPM Suppose that the Treasury bill rate is 6%...Ch. 8 - CAPM The Treasury bill rate is 4%, and the...Ch. 8 - Cost of capital Epsilon Corp. is evaluating an...Ch. 8 - APT Consider a three-factor APT model. The factors...Ch. 8 - Prob. 18PSCh. 8 - APT Consider the following simplified APT model:...Ch. 8 - Prob. 20PSCh. 8 - Three-factor modelThe following table shows the...Ch. 8 - Efficient portfolios Look again at the set of the...
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