Answer the questions to Problem 1 with data from Chapter 4, Problem 2. Problem 1 Return to the…

Answer the questions to Problem 1 with data from Chapter 4, Problem 2. Problem 1 Return to the…

Answer the questions to Problem 1 with data from Chapter 4, Problem 2.

Problem 1

Return to the example presented in Problem 1, Chapter 4.

A. Assuming short selling is not allowed:

(1) For securities 1 and 2, find the composition, standard deviation, and expected return of the portfolio that has minimum risk.

(2) On the same graph, plot the expected return and standard deviation for all possible combinations of securities 1 and 2.

(3) Assuming that investors prefer more to less and are risk avoiders, indicate in red those sections of the diagram in Part 2 that are efficient.

(4) Repeat steps 1, 2, and 3 for all other possible pairwise combinations of the securities shown in Problem 1 of Chapter 4.

B. Assuming short selling is allowed:

(1) For securities 1 and 2, find the composition, standard deviation, and expected return of the portfolio that has minimum risk.

(2) On the same graph, plot the expected return and standard deviation for all possible combinations of securities 1 and 2.

(3) Assuming that investors prefer more to less and are risk avoiders, indicate in red those sections of the diagram in Part 2 that are efficient.

(4) Repeat steps 1, 2, and 3 for all other possible pairwise combinations of the securities shown in Problem 1 of Chapter 4.

C. Assuming that the riskless lending and borrowing rate is 5%, and short sales are allowed, find the location of the optimal portfolio from among those considered. Repeat for a rate of 8%.

Problem 1 of Chapter 4.

Assume that you are considering selecting assets from among the following four candidates:

Assume that there is no relationship between the amount of rainfall and the condition of the stock market.

A. Solve for the expected return and the standard deviation of return for each separate investment.

B. Solve for the correlation coefficient and the covariance between each pair of investments.

C. Solve for the expected return and variance of each of the portfolios shown in the following.

 

D. Plot the original assets and each of the portfolios from Part C in expected return standard deviation space.

Problem 2.

Following are actual price and dividend data for three companies for each of seven months.

A. Compute the rate of return for each company for each month.

B. Compute the average rate of return for each company.

C. Compute the standard deviation of the rate of return for each company.

D. Compute the correlation coefficient between all possible pairs of securities.

E. Compute the average return and standard deviation for the following portfolios:

 

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