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    Expected return, standard deviation of stocks/portfolio

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    Week 6 - Problem 1

    10.6 Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.17, E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively.

    a. Calculate the expected return and standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.

    b. Calculate the standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation coefficient between the returns on A and B is -0.6.

    c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?

    Week 6 - problem 2

    Suppose the expected return on the market portfolio is 14.7 percent and the risk-free rate is 4.9 percent. Morrow Inc.stock has a beta of 1.3 . Assume the capital-asset-pricing model holds.

    a. What is the expected return on Morrow's stock?

    b. If the risk-free rate decreases to 4 percent, what is the expected return on Morrow's stock?

    Week 6 - Problem 3

    A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22 percent and a standard deviation of 5 percent. The risk-free rate is 4.9 percent, and the expected return on the market portfolio is 19 percent. Assume the capital-asset-pricing model holds.

    What expected rate of return would a security earn if it had a 0.6 correlation with the market portfolio and a standard deviation of 3 percent?

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    Week 6 - Problem 1

    10.6 Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.17,
    E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively.

    a. Calculate the expected return and standard deviation of a portfolio that is composed of
    35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.

    b. Calculate the standard deviation of a portfolio that is composed of 35 percent A and
    65 percent B when the correlation coefficient between the returns on A and B is -0.6.

    c. How does the correlation between the returns on A and B affect the standard deviation
    of the portfolio?
     SHOW ALL CALCULATIONS

    a. Calculate the expected return and standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.

    Stock Weights (x) Expected return ( r ) Standard deviation (σ) Correlation (ρ)
    A 0.35 0.17 0.12 0.6
    B 0.65 0.27 0.21

    Expected return = xA rA + xB rB= 0.235 =0.35*0.17+0.65*0.27
    Standard deviation =√ (xA^2σA^2 + xB^2σB^2+ 2 xAxBρσAσB)= 0.1652
    =√(0.35^2*0.12^2+0.65^2*0.21^2+2*0.35*0.65*0.6*0.12*0.21)

    b. Calculate the standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation between the returns on A and B is -0.6.

    Stock Weights (x) Expected return ( r ) Standard ...

    Solution Summary

    The solution calculate the expected return and standard deviation of a portfolio and expected return of a stock using capital-asset-pricing model (CAPM).

    $2.19

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