Question

Question 3 (total of 20 marks): An investor holds a portfolio comprising three assets (or stocks) A, B and C. Refer to the below tables to answer the questions that follow. Assume that returns are effective annual rates: Variables Stock A Stock B Stock C 33% 40% 25% Stock return standard deviation 0.25 $ 55,000.00 0.33 35,000.00 0.22 10,000.00 Investment $ $ Assume the following information holds: Correlation coefficient of the returns between A & B 0.10 Correlation coefficient of the returns between A&C 0.35 Correlation coefficient of the returns between B & C -0.85 Question 3a (3 marks): What is the weight of each stock in the portfolio? Question 3b (3 marks): What is the expected return of the portfolio? Question 3c (4 marks): What is the variance of the portfolio? Question 3d (1 marks): What is the standard deviation of the portfolio? Question 3e (3 marks): Using the above table find the covariance of the returns between A & B, A & C and B & C? Question 3f (2 marks): Which combination of the stocks correlation coefficient will provide the maximum benefit of portfolio diversification? Explain your reasoning. Question 3g (2 marks): Assume the betas of stock A, B and C are 1.3, 1.0 and 1.8 respectively. What is the portfolio beta? Is the portfolio more or less risky than the market? Question 3h (2 marks): If the proportion of your money invested in stocks A, B and C are, 15%, 80% and 5% respectively, what is the portfolio expected return?

Answer 1

Date: 1 /__Page no: Colculation of Weight of each Stack in Portfolio Stock Inuestment Weight of each Stock = Stock (in $) Total Inuestment 55.000 Investment in • 5.5 S.S.000 100.000 35,000 . 35 35.000 100.000 C 10.000 10 3s 10,000 100.000 Total = 100.000 Investment So Weight of Stock A (WA) = 55 Stock B (WB) = .35. Stock c (Wc) = .10

E 3B) Expected Return of Portfolio Guien Stock A Stock B - Sepected Return lins) 33 40 Weights of Stock .SS (WA) 35 (WB) Stock C 25 10 (We) Expected Return & Return x Weight & Return & Weight & Return & Weight of Portfolio of Stock A of A of Stock B of B of Stockc ofc = 33% X.55 + 40 % x-35 + 25% x.10 = 34.65 % Return of Partfalio 34.65 % Expected

Date: _/ / _Page no: 3d) - Date Portfalis d _Page no: e Standard deviation of Guien Standard Deviation - Weight of Stock Stock A #25 (OA) .SS (WA) Stock B 33 (B) .3 (WB) Stock c . 22 (oc) . 10 (We)

Standard / Carrelatism - Deuiation (AXWA)?+ (B x WB)² + 2 x A x B x WAX WB x Cafficient batues of Porthalis /+ (OBXWB)² + (Ex We) + 2x B x cx WAX We x betun Bos HOAX WA)²+(C x Wc j² + 2xAX CXWAX Wex action Carorelalian Co Stock AAC = 16.25 X.55)*+ (133X:35.) + 2x.25 X:33 X.55 x 35 x 70 )+(°33 *•35) + (-22 xol) + 2x 33 x 22 X:35 X 10 X (-.85) ✓ +(.257.55)2 + (•22 x:12?+ 2x.25 X 22 X.55 X 10 X •35 = Standard 2577 deviation of (Raunded off to 4 decimal) Partfalis = .2577 • 2577

3c) Variance of Variance - Partfalia Standard Denistián of Parlfalis 2 = = c.25 77 )? .0664 Variance of Portfalia is .0664