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Question 2: a) Catherine invests 20% of her wealth in the risk free asset and...

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Finance

Question 2:

a) Catherine invests 20% of her wealth in the risk free asset and the rest in Apple shares and Google shares. The risk premium on Apple shares is 10%, the risk premium on Google is 7% and the market risk premium is 8%. Catherines total portfolio of the three assets is 10% less risky than the market portfolio. Calculate the weight of Apple in her portfolio. Assume that the Capital Asset Pricing Model holds.

b) (Note: question b is not related to question a.) Over the past four years, the historical returns on stock X are as follows:

Year Return Stock X
2006 12%
2007 8%
2008 2%
2009 15%

Stock X has a beta of 1.3. Consider a portfolio of stocks X and Y. Stock Y has a beta of 0.9. Over the past 4 years, stock Y had an arithmetic average return of 7%. The covariance between stocks X and Y is 0.0025. The portfolio was 15% riskier than the market portfolio and had a coefficient of variation of 1.5. The coefficient of variation is defined as the standard deviation divided by the arithmetic average return. Calculate the ex-post standard deviation of stock Y.

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