Consider the following variance-covariance matrix rm rA rB rC rD rM 0.41 rA 0.43 0.65 rB 0.49 0.39 0.84 rC 0.30 0.13 0.30 0.58 rD 0.50 0.43 0.61 0.34 1.48 Average return rM rA rB rC rD R average return 0.0585 0.1122 0.0314 0.0525 -0.0563 0.03 a. if you would like to create a risky...

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Finance

Consider the following variance-covariance matrix
rm rA rB rC rD
rM 0.41
rA 0.43 0.65
rB 0.49 0.39 0.84
rC 0.30 0.13 0.30 0.58
rD 0.50 0.43 0.61 0.34 1.48
Average return
rM rA rB rC rD R
average return 0.0585 0.1122 0.0314 0.0525 -0.0563 0.03
a. if you would like to create a risky protfolio X of two stocks- stock A and stock C, how would you allocate your investments?identify the minimum variance portfolio consisting of stocks A andC
b. what is the risk(standard deviation) and return(mean) of yourminimum variance portfolio consisting of stock A & C in part(a)? Compute the Sharpe ratio of your minimum varianceportfolio.
c. if your complete portfolio Z consists of risky portfolio Xand risk-free assets(t-bill) with capital allocation of 20% onT-bills and remaining on risky assets, what is the return andstandard deviation of your complete portfolio Z. Compare youranswers with answer in part (b)
d. Estimate the systematic risk(beta) of each stock(stock A, B,Cand D) required rate of return for each stock.
e. Identify each stock whether it is overpriced or underpricedor correctly priced
f. If you have a risky portfolio Y which consists of all fourstocks with eq. what is your portfolio beta. What is the requiredrate of return on you as postulated by SML.

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3.9 Ratings (561 Votes)

Answer to 1st 4 parts Answer a Minimum Variance Portfolio X of A C Proportion for Portfolio X Variance as per chart above wA 46 vA 065 Note Proportions are solved See Answer

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Consider the following variance-covariance matrixrmrArBrCrDrM0.41rA0.430.65rB0.490.390.84rC0.300.130.300.58rD0.500.430.610.341.48Average returnrMrArBrCrDRaverage return0.05850.11220.03140.0525-0.05630.03a. if you would like to create a risky protfolio X of two stocks- stock A and stock C, how would you allocate your investments?identify the minimum variance portfolio consisting of stocks A andCb. what is the risk(standard deviation) and return(mean) of yourminimum variance portfolio consisting of stock A & C in part(a)? Compute the Sharpe ratio of your minimum varianceportfolio.c. if your complete portfolio Z consists of risky portfolio Xand risk-free assets(t-bill) with capital allocation of 20% onT-bills and remaining on risky assets, what is the return andstandard deviation of your complete portfolio Z. Compare youranswers with answer in part (b)d. Estimate the systematic risk(beta) of each stock(stock A, B,Cand D) required rate of return for each stock.e. Identify each stock whether it is overpriced or underpricedor correctly pricedf. If you have a risky portfolio Y which consists of all fourstocks with eq. what is your portfolio beta. What is the requiredrate of return on you as postulated by SML.

	rm	rA	rB	rC	rD
rM	0.41
rA	0.43	0.65
rB	0.49	0.39	0.84
rC	0.30	0.13	0.30	0.58
rD	0.50	0.43	0.61	0.34	1.48

	rM	rA	rB	rC	rD	R
average return	0.0585	0.1122	0.0314	0.0525	-0.0563	0.03