PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 8, Problem 7PS
Portfolio risk and return* Here are returns and standard deviations for four investments.
Calculate the standard deviations of (the following portfolios.
- a. 50% in Treasury bills, 50% in stock P.
- b. 50% each in Q and R, assuming the shares have
- • Perfect positive correlation.
- • Perfect negative correlation.
- • No correlation.
- c. Plot a figure like Figure 8.3 for Q and R, assuming a correlation coefficient of .5.
- d. Stock Q has a lower return than R but a higher standard deviation. Does that mean that Q’s price is too high or that R’s price is too low?
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Students have asked these similar questions
QG. The following information is available about the stocks of two companies A and B:
Stock A Stock B
Expected Return (%)
Probability
-5
12
15
20
0.05
0.55
0.35
0.05
Expected Return (%)
Probability
5
15
18
20
0.05
0.65
0.20
0.10
Stock
Standard Deviation of Returns (%)
A
B
25
35
The coefficient of correlation between the returns on A and B is 0.05. A portfolio is constructed by allocating the funds between A and B in the ratio of 2:3.
Calculate the expected return on the portfolio. b. Calculate the portfolio risk.
Suppose a portfolio is given as follows:
Investment
Name
ABC Corn Mill
X-Treme
Manufacturing
b.) 3.6%
Ob.) none listed
a.) none listed
a.) 4.5%
a.) 4%
b.) 4%
b.) 3.4%
Weight
a.) 5%
0.4
0.6
a.) What is the expected return of the portfolio?
b.) What is the standard deviation of the portfolio if the correlation is +0.4?
Select the most appropriate responses below for parts a.) and b.).
Expected Return
2%
7%
Standard
Deviation
2%
5%
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?
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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