Please help with question 8 - 11 based on the following Information, calculate t
ID: 2620587 • Letter: P
Question
Please help with question 8 - 11
based on the following Information, calculate the expected return and the risk measured by standard deviation, for the two shares 11. Self-assessment exercises: Expected rate of return Share B State of Economy Probablity 0.15 0.55 0.30 Share A 0.05 0,09 0.13 -0.02 0.10 0.25 Recession Normal Boom 8. You f Required orm a portfolio of shares A and B investing 30 percent in A and 70 percent in B a) Calculate the expected return of this portfolido b) Determine the variance and standard deviation of the portfolio. 9. A share has a beta of 0.90 and an expected return of 13 per cent. A risk-free asset currently earns 7 per cent Required a) Calculate the expected return on a portfolio that is equally invested in the two assets. b) if the portfolio of the two assets has a beta of 0.6 calculate the portfolio weights c) If a portfolio of the two assets has an expected return of 11 per cent, calculate its beta d) If a portfolio of the two assets has a beta of 1.80, calculate the portfolio weights. How do you interpret the weights for the two assets in this case? 10. If a portfolio has a positive investment in every asset?, can the expected return on the portfolio be greater than that on every asset in the portfolio? Can it be less than that on every asset in the portfolio? If your answer is yes to one or both of these questions, give an example to support your answer. 11. What are the portfolio weights for a portfolio that has 40 shares that sell for N$35 per share and 30 shares that sell for N$25 per shareExplanation / Answer
Q8 Expected Return of The Stock A Probability of economy * Return 0.15*0.05+0.55*0.09+0.30*0.13 9.60% 0.096 Expected Return of The Stock B Probability of economy * Return 0.15*0.02+ 0.55*0.1+0.3*0.25 13.30% 0.133 Expected Return of the Portfolio 30%A Stock + 70%B stock Return 0.3*9.6%+ 0.7*13.3% 12.19% Standard Variation & Variance of the portfolio For Stock A Probability Share A(X) X-Mean(9.6) Squared of Deviation Prob*Sq Dev 0.15 0.05 -0.046 0.002116 0.0003174 0.55 0.09 -0.006 0.000036 0.0000198 0.30 0.13 0.034 0.001156 0.0003468 0.000684 For Stock B Probability Share A(X) X-Mean(13.3) Squared of Deviation Prob*Sq Dev 0.15 0.02 -0.113 0.012769 0.00191535 0.04788 0.55 0.10 -0.033 0.001089 0.00059895 0.1863 0.30 0.25 0.117 0.013689 0.0041067 0.006621 Vaariance 0.000684*70%+0.006621*30% 0.02% Standard eviation (Variance)^1/2 (0.024651)^1/2 0.50% Q9 Expected return of stock 13% a) Expected return of portfolio 13%*0.5+13%*0.5 13% b) As per CAPM Theory Expected Return= Risk Free Rate+ Beta(Risk premium) 13%=7%+0.9(Risk Premuim) Risk Premium = 6.67% Return using Beta of 0.6 7%+ 0.6(6.67%) 5 10 11% c) 11%= 7%+ BETA(6.67%) Beta= 0.59 Q10 It is always less than or equal to return of the asset and it all depends on diversification Suppose Asset A Return 10% Asset B Return 5% Now if invest total 100% in Asset A you will get return of 10%*100%=10% If invest 70% in A & 30% in B then Expected return will be 70%*10%+ 30%*5%=8.5% So, it can't exceed every stock return simultaneously Q11 Lot 1 40 Shares for $35 Lot 2 30 Shares for $25 Lot 1 Value $1400 Lot 2 Value $750 $2150 Portfolio Weight $1400/$2150 0.65 Portfolio Weight $750/$2150 0.35 So, 65% in 1st Lot & 35% in 2nd Lot