You plan to invest in Stock X,Stock Y,or some combination of the two.The expected return for X is 10% and $\sigma$ _X = 5%.The expected return for Y is 12% and $\sigma$ _Y = 6%.The correlation coefficient,r_XY,is 0.75.
a.
Calculate r_p and $\sigma$ _p for 100%, 75%, 50%, 25%, and 0% in Stock X.
b.
Use the values you calculated for r_p and $\sigma$ _p to graph the attainable set of portfolios. Which part of the attainable set is efficient? Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y. Let an indifference curve be tangent to the efficient set at the point where r_p = 11%.
c.
Now suppose we add a riskless asset to the investment possibilities. What effects will this have on the construction of portfolios?
d.
Suppose r_M = 12%, $\sigma$ _M = 4%, and r_RF = 6%. What would be the required and expected return on a portfolio with $\sigma$ _P = 10%?
e.
Suppose the correlation of Stock X with the market, r_XM, is 0.8, while r_YM = 0.9. Use this information, along with data given previously, to determine Stock X's and Stock Y's beta coefficients.
f. What is the required rate of return on Stocks X and Y? Do these stocks appear to be in equilibrium? If not, what would happen to bring about an equilibrium?

Question

You plan to invest in Stock X,Stock Y,or some combination of the two.The expected return for X is 10% and

\sigma

_X = 5%.The expected return for Y is 12% and

\sigma

_Y = 6%.The correlation coefficient,r_XY,is 0.75.
a.
Calculate r_p and

\sigma

_p for 100%, 75%, 50%, 25%, and 0% in Stock X.
b.
Use the values you calculated for r_p and

\sigma

_p to graph the attainable set of portfolios. Which part of the attainable set is efficient? Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y. Let an indifference curve be tangent to the efficient set at the point where r_p = 11%.
c.
Now suppose we add a riskless asset to the investment possibilities. What effects will this have on the construction of portfolios?
d.
Suppose r_M = 12%,

\sigma

_M = 4%, and r_RF = 6%. What would be the required and expected return on a portfolio with

\sigma

_P = 10%?
e.
Suppose the correlation of Stock X with the market, r_XM, is 0.8, while r_YM = 0.9. Use this information, along with data given previously, to determine Stock X's and Stock Y's beta coefficients.
f. What is the required rate of return on Stocks X and Y? Do these stocks appear to be in equilibrium? If not, what would happen to bring about an equilibrium?

Quizplus · Accepted Answer

The Answer of You plan to invest in Stock X,Stock Y,or some combination of the two.The expected return for X is 10% and $\sigma$_X = 5%.The expected return for Y is 12% and $\sigma$_Y = 6%.The correlation coefficient,r_XY,is 0.75. a. Calculate r_p and $\sigma$_p for 100%, 75%, 50%, 25%, and 0% in Stock X. b. Use the values you calculated for r_p and $\sigma$_p to graph the attainable set of portfolios. Which part of the attainable set is efficient? Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y. Let an indifference curve be tangent to the efficient set at the point where r_p = 11%. c. Now suppose we add a riskless asset to the investment possibilities. What effects will this have on the construction of portfolios? d. Suppose r_M = 12%, $\sigma$_M = 4%, and r_RF = 6%. What would be the required and expected return on a portfolio with $\sigma$_P = 10%? e. Suppose the correlation of Stock X with the market, r_XM, is 0.8, while r_YM = 0.9. Use this information, along with data given previously, to determine Stock X's and Stock Y's beta coefficients. f. What is the required rate of return on Stocks X and Y? Do these stocks appear to be in equilibrium? If not, what would happen to bring about an equilibrium?

You Plan to Invest in Stock X,Stock Y,or Some Combination σ\sigmaσ

You Plan to Invest in Stock X,Stock Y,or Some Combination $\sigma$