Assignment 5-Chapter 11 (1) [Compatibility Mode] - Word Ahmed Raed Ahmed Tarbosh

Question

Assignment 5-Chapter 11 (1) [Compatibility Mode] - Word Ahmed Raed Ahmed Tarbosh File Home Insert Design Layout References Mailings Review View Add-ins ACROBAT Tell me what you want to do Share Chapter 11 1.You have a portfolio consisting solely of stock A and stock B. The poctfolio has an expected retun of 8.7 percent. Stock A has an expected return of 11.4 percent while stock B is expected to retum 6.4 percent. What is the portfolio weight ofstock A? 2. A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is 0.85. What percentage of the portolio i inveated in the atock? 3.The market and stock A hae the following probability distributions of expected future Possible State of Probability that the Expected Return on Expected Market the Eoonomy State will Occur Stock A if State Retum if State 30 0.40 Normal 10% 9% Calculate the standard deviations for the market and etock A Calculate the correlation between the market and stock A 4Five investment alternatives have the following retuns and variance of returns. Expected Return % Variance % 14 16 13 17 12 Using the coefficient of variation, rank the five altematives from lowest risk to highest risk. Page 1 ot 1 217 words Arabic Saudi Arabia) 80% ») ENG 11:24 PM 12/7/2017

Explanation / Answer

Solution :

1. Let the weight of stock A = x

therefore the weight of stock B = 1-x

We know that,

Portfolio Expected Return = Weight of stocks in portfolio * Stock Expected Return

8.7 = WaRa + WbRb

8.7 = (x*11.4) + (1-x)*6.4

8.7 = 11.4x + 6.4 - 6.4x

5x = 2.3

x = 0.46

Weight of Stock A, x = 0.46

Weight of Stock B, 1-x = 1-0.46 = 0.54

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