Consider the following information. Standard deviation of return on the market is 15%
(i) Calculate expected return for stock A, stock B and
stock C. (ii) Calculate the expected return and standard deviation
of a portfolio which invests one-third in stock A, one-third in
stock B, and one-third in stock C. (iii) Calculate the expected return and standard deviation
of a portfolio which invests one-third in the risk free asset,
one-third in stock B, and one-third in stock C. (iv) Calculate the expected return and standard deviation
of a portfolio which invests 50% in stock B, and 50% in stock C.
The investor puts up only 50% of the total amount and borrows the
balance from the broker at the risk free rate. (v) Compare your answers to (ii), (iii) and (iv) and
recommend which portfolio you would prefer giving reasons. Stock A Stock B Stock C Beta 2.20 1.80 1.60 Standard deviation of return (%) 60 50 40 Purchase the answer to view it
Expected market return is 15%
Risk free rate is 5%
Correlation coefficient of return between stock A and stock B
is 0.60 Correlation coefficient of return between stock A and stock
C is 0.40 Correlation coefficient of return between stock B and
stock C is 0.20
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