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# p8-15 A-C 333 CHAPTER 8 Risk and Return a. If the returns of assets V and...

p8-15 A-C

333 CHAPTER 8 Risk and Return a. If the returns of assets V and W are perfectly positively correlated (correlation coefficient = +1), describe the range of (1) expected return and (2) risk associ- ated with all possible portfolio combinations. b. If the returns of assets V and W are uncorrelated (correlation coefficient = 0), describe the approximate range of (1) expected return and (2) risk associated with all possible portfolio combinations c. If the returns of assets V and W are perfectly negatively correlated (correlation coefficient -1), describe the range of (1) expected return and (2) risk associ- ated with all possible portfolio combinations. Personal Finance Problem P8-16 International investment returns Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation. He pur- chased 1,000 shares at 20.50 pesos per share. Twelve months later, he sold them at 24.75 pesos per share. He received no dividends during that time. a. What was Joe's investment return (in percentage terms) for the year, on the basis of the peso value of the shares? b. The exchange rate for pesos was 9.21 pesos per US\$1.00 at the time of the pur- chase. At the time of the sale, the exchange rate was 9.85 pesos per US\$1.00. Translate the purchase and sale prices into US\$. c. Calculate Joe's investment return on the basis of the US\$ value of the shares d. Explain why the two returns are different. Which one is more important to Joe? Why? P8-17 Total, nondiversifiable, and diversifiable risk David Talbot randomly selected securi- ties from all those listed on the New York Stock Exchange for his portfolio. He began with a single security and added securities one by one until a total of 20 securities were held in the portfolio. After each security was added, David calculated the portfolio standard deviation, o,. The calculated values are shown in the following table Number of securities Portfolio risk, o, Portfolio risk, a Number of ucities
100% of asset F 1 50% of asset F and 50% of asset G 2 50% of asset F and 50% of asset H 3 a. Calculate the expected return over the 4-year period for each of the three alternatives. b. Calculate the standard deviation of returns over the 4-year period for each of the three alternatives. c. Use your findings in parts a and b to calculate the coefficient of variation for each of the three alternatives. d. On the basis of your findings, which of the three investment alternatives do you recommend? Why? P8-15 Correlation, risk, and return Matt Peters wishes to evaluate the risk and return be haviors associated with various combinations of assets V and W under three as- sumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative The expected returns and standard deviations calculated for each of the assets are shown in the following table. Expected Risk (standard deviation), o, Asset return, r V 8% 5% 13 10

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

CHANGE IN CORRELATION COEFFICIENT DOES NOT AFFECT RETURNS, SO EXPECTED RANGE OF RETURNS REMAIN SAME IN ALL 3 CASES.

THE RISK = STANDARD DEVIATION WILL BE LOWEST WHEN THE CORRELATION IS NEGATIVE, AS IT LEADS TO FAVOURABLE DIVERSIFICATION

I SOLVED THIS SUM EARLIER, IT WAS MENTIONED TO ROUND TO 1 DECIMAL SO I HAVE ROUNDED TO STANDARD DEVIATION = RISK TO 1 DECIMAL.

IF YOU WANT TO MAKE ME CHANGE, LET ME KNOW TILL WHAT DECIMALS, I SHOULD ROUND.

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