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# Portfolio analysis:

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You can invest in two funds A and B with the following characteristics:
Fund E(R) Beta
A 12% 0.90
B 18% 1.50
The riskfree return is 5%. The market risk premium is 8%. The standard deviation of the market return is 20%. The two funds have no non-systematic risk. (Show your work)

1) What is the alpha of the two funds?

2) What is the standard deviation of the two funds?

3) What is the correlation of the two funds?

see attached file.

#### Solution Preview

You can invest in two funds A and B with the following characteristics:
Fund E(R) Beta
A 12% 0.9
B 18% 1.5

The riskfree return is 5%. The market risk premium is 8%. The standard deviation of the market return is 20%. The two funds have no non-systematic risk. (Show your work)

1) What is the alpha of the two funds?
Alpha is the difference in return between actual return- required return as ...

#### Solution Summary

Calculates alpha, standard deviation and correlation of two funds.

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## Scenario & Portfolio Analysis for a Return on Stocks and Bonds

1) SCENARIO ANALYSIS: Consider the following scenario-analysis

RATE OF RETURN
Scenerio Probability Stocks Bonds
recession .20 -5% +14%
normal economy .60 +15 + 8%
boom .20 +25 + 4%

a. Is it reasonable to assume that Treasury Bonds will provide higher returns in recessions than in booms?

b. How do I calculate the
expected rate of return and standard deviation for each investment?

c. And which investments would you prefer?

2) PORTFOLIO ANALYSIS: Using the data in the above problem and considering a portfolio with weights of .60 in stocks and .40 in bonds.

a. What is the rate of return on the portfolio in each scenario?
b. What is the expected rate of return and standard deviation of the portfolio?
c. Would you prefer to invest in the portfolio, in stocks only, or in bonds only?

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