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Unit 2: Risk and Return




          24.  Assume the investor in Problem 35  wants to determine how  risky his portfolio is and  Notes
               wants you to compute the portfolio variance. If the expected correlations and variance of
               the stocks are as follows, what is the variance of the portfolio?
             Correlations                 ABC          BCD         CDE         DEF
                              BCD          .50          -            -          -
                              CDE          .60         .30           -          -
                              DEF         -.30         -.20         -.10        -
              Variances:                   .04         .16          .02         .10

          25.  Suppose you have  10,000 to invest and would like to sell   5,000 in stock XYZ short to
               invest in ABC. Assuming no correlation between the two securities, compute the expected
               return and the standard deviation of the portfolio from the following characteristics:
                    Security                   ABC                      XYZ
                     E(R)                      .12                      .02
                     σ (R)                     .08                      .10

          26.  Suppose we have two portfolios known to be on the minimum variance set for a population
               of three securities A, B, and C. There are no restrictions on short sales. The weights for each
               of the two portfolios are as follows:
                                      W A               W B                W C
                Portfolio X           .24                .52                .24
                Portfolio Y           -.36               .72                .64
               (a)  What would the stock weights be for a portfolio constructed by investing  2,000 in

                    portfolio X and  1,000 in portfolio Y?
               (b)  Suppose you invest  1,500 of the   3,000 in Security X. How will you allocate the
                    remaining  1500 between Securities X and Y to ensure that your portfolio is on the
                    minimum variance set?
          27.  A stock that pays no dividends is currently selling at  100.  The possible prices for which
               the stock might sell at the end of one year, with associated probabilities, are:
                    End-of-year Price (in  )                  Probability
                            90                                    0.1
                            100                                   0.2
                            110                                   0.4
                            120                                   0.2
                            130                                   0.1
               (a)  Calculate the expected rate of return by year-end.
               (b)  Calculate the standard deviations of the expected rate of return.

          28.  An investor saw an opportunity to invest in a new security with excellent growth potential.
               He wants to invest more than he had, which was only  10,000. He sold another security
               short with an expected rate of return of 15%. The total amount he sold of was  40,000, and
               his total amount invested in the growth security, which had an expected rate of return of
               30%, was that   50,000. Assume no margin requirements, what is his  expected rate of
               return on this portfolio.








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