You can form a portfolio of two assets, A and B, whose returns have the following characteristics

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1. You can form a portfolio of two assets, A and B, whose returns have the following characteristics: Stock Expected Return Standard Deviation Correlation A 10% 20% .5 B 15 40 If you demand an expected return of 12%, what are the portfolio weights? What is the portfolio’s standard deviation? 2. Here are some historical data on the risk characteristics of Dell and McDonald’s: Dell McDonald’s ? (beta) 1.41 .77 Yearly standard deviation of return (%) 30.9 17.2 Assume the standard deviation of the return on the market was 15%. a. The correlation coefficient of Dell’s return versus McDonald’s is .31. What is the standard deviation of a portfolio invested half in Dell and half in McDonald’s? b. What is the standard deviation of a portfolio invested one-third in Dell, one-third in McDonald’s, and one-third in risk-free Treasury bills? c. What is the standard deviation if the portfolio is split evenly between Dell and McDonald’s and is financed at 50% margin, i.e., the investor puts up only 50% of the total amount and borrows the balance from the broker? d. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.41 like Dell? How about 100 stocks like McDonald’s? ( Hint: Part (d) should not require anything but the simplest arithmetic to answer.) Jul 18 2014 07:55 AM

 

Solution ID:609069 | This paper was updated on 26-Nov-2015

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