Financial Management Question

Wan Lun

2009-07-19 5:48 pm

1) Consider two risky stocks A and B. Stock A has an expected return of 20% and a standard deviation of 25%. Stock B has an expected return of 16% and a standard deviation of 13%. The correlation between the returns of A and B is +0.3. What is the expected return and standard deviation of a portfolio with 60% in A dn 40% in B?

2) Suppose the assumptions of the CAPM are satisfied. The risk free rate is 5%. The expected return on the market portfolio is 16%. You have discovered two well diversified portfolios with no firm-specific risk which have the following characteristics :

Portfolio A = Expected Return 8% / Bata 0.2
Portfolio B = Expected Return 17% / Bata 1.2

Which portfolio you will buy and which portfolio you will sell? Please briefly explain.

回答 (1)

myisland8132

2009-07-20 2:12 am

✔ 最佳答案

1 ra=0.2 rb=0.16 σa=0.25 σb=0.13 wa=0.6 wb=0.4
The expected return
=wa ra+wb rb
=0.184

The variance
=wa2σa2+wb2σb2+2wawbρσaσb
=0.029884
The standard deviation is 0.1729=17.29%
2 rf=0.05 rm=0.16
According the pricing model
r-rf=β(rm-rf)
Substitute the requiring information
The value of raand rb is 0.072 and 0.182
So, the Expected Return of Portfolio B is higher than the calculated value using the pricing model, this indicates that Portfolio B is outperformed the other similar stocks (with same beta) in the market and I should choose it.

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