Explore BrainMass
Share

Portfolio Risk and Return, Beta, Standard deviation

1) Consider the following three investments:

Security Expected return Standard deviation
J 0.12 0.4
K 0.14 0.4
L 0.13 0.5
M 0.12 0.3

Using the mean-variance criteria, identify whether one security dominates or whether there is no dominance for each pssible pair of securities

2) Tor Johnson has identified the following securities for a portfolio:

Security Amount invested Expected Return Beta
A $1,000 0.10 0.75
B 5000 0.15 1.20
C 1500 0.12 0.90
D 2500 0.16 1.30

Compute the expected return of the portfolio. Compute the beta of the portfolio.

3) Stock X has a standard deviation of return of 0.6 and stock Y has a standard deviation of 0.4. The correlation of the two stocks is 0.5. Compute the standard deviation of a portfolio invested half in X and half in Y.
4) The expected standard deviation of market returns is 0.20. Maria Houseman has the following four stocks:
Standard deviation of market returns= 0.20

Security Standard deviation Correlation with market
A 0.30 0.70
B 0.75 0.30
C 0.45 0.50
D 0.50 0.16

Compute the beta of each stock

5) The rate of treasury bills is 4% and the equity risk premium is 10%. Use the SML to estimate the return on each of the stocks in problem 4.

6) Maria has decided to invest $5,000 in each of the stocks in 4). Compute the expected return on the portfolio and the portfolio beta.

Please see attached file

© BrainMass Inc. brainmass.com July 20, 2018, 6:37 pm ad1c9bdddf

Attachments

Solution Preview

Please see the attached file.
1 Standard deviation Expected return
J 0.4 0.12
K 0.4 0.14
L 0.5 0.13
M 0.3 0.12

If we plot the expected return against the standard devition we see that
J has a standard deviation of 0.4 and expected return of 0.12
K has a standard deviation of 0.4 and expected return of 0.14

Thus K has a higher return for the same risk (standard deviation)
K dominates J

2 Amount invested Expected Return Beta
A $1,000 0.10 0.75
B 5000 0.15 1.20
C 1500 0.12 0.90
D 2500 0.16 1.30

Return of portfolio
r p=summation of wi* ri = w1* r1 + w2*r2+w3r3+w4r4+---
Beta of portfolio
beta p=summation of wi* beta i= w1* beta 1 + w2*beta 2+ w3beta 3 + w4beta 4+---

Amount invested Expected Return Beta
A $1,000 0.10 0.75
B 5000 0.15 1.20
C 1500 0.12 0.90
D 2500 0.16 1.30

Amount invested "weights
(wi)" "Expected Return
(ri)" wi* ri "Beta ...

Solution Summary

Calculates Portfolio return, Portfolio beta, Portfolio standard deviation, Beta of stock etc.

$2.19