IA Hw Ch. 6

Asset A has an expected return of 15% and a standard deviation of 20%. The risk-free rate is 5%. What is the reward-to-variability ratio?

15% - 5% / 20% = 0.50

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 37%. Stock B has an expected return of 16% and a standard deviation of return of 22%. The correlation coefficient between the returns of A and B is .5. The risk-free rate of return is 6%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.

Ch. 6 Q. 3 in Photos (Formula in separate pic) *Optimal Risky Portfolio*

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 4.2%. The probability distributions of the risky funds are: The correlation between the fund returns is 0.0308. What is the expected return and standard deviation for the minimum-variance portfolio of the two risky funds?

Minimum Variance: Ch. 6 Q. 4 in Photos *Cov (rs, rb) = (St.d of A * St.d of B) (p)

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 28%, while stock B has a standard deviation of return of 22%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is 0.050, the correlation coefficient between the returns on A and B is _________. *Correlation Coefficient is p*

Variance = (Weight^2)(St.d ^2) +(Weight^2)(St.d^2) + 2(Weight)(Weight)(St.d)(St.d)(p) 0.050 = (0.6^2)(0.28^2) + (0.4^2)(0.22^2) + 2(0.6)(0.4)(0.28)(0.22) ρ; ρ = 0.475