# Question: Here are some historical data on the risk characteristics of Dell

Here are some historical data on the risk characteristics of Dell and McDonald’s:

Assume the standard deviation of the return on the market was 15%.

a. The correlation coefficient of Dell’s return versus McDonald’s is .31. What is the standard deviation of a portfolio invested half in Dell and half in McDonald’s?

b. What is the standard deviation of a portfolio invested one-third in Dell, one-third in McDonald’s, and one-third in risk-free Treasury bills?

c. What is the standard deviation if the portfolio is split evenly between Dell and McDonald’s and is financed at 50% margin, i.e., the investor puts up only 50% of the total amount and borrows the balance from the broker?

d. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.41 like Dell? How about 100 stocks like McDonald’s? (Part (d) should not require anything but the simplest arithmetic toanswer.)

Assume the standard deviation of the return on the market was 15%.

a. The correlation coefficient of Dell’s return versus McDonald’s is .31. What is the standard deviation of a portfolio invested half in Dell and half in McDonald’s?

b. What is the standard deviation of a portfolio invested one-third in Dell, one-third in McDonald’s, and one-third in risk-free Treasury bills?

c. What is the standard deviation if the portfolio is split evenly between Dell and McDonald’s and is financed at 50% margin, i.e., the investor puts up only 50% of the total amount and borrows the balance from the broker?

d. What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.41 like Dell? How about 100 stocks like McDonald’s? (Part (d) should not require anything but the simplest arithmetic toanswer.)

**View Solution:**## Answer to relevant Questions

Calculate the beta of each of the stocks in Table 7.9 relative to a portfolio with equal investments in eachstock.Suppose that the Treasury bill rate were 6% rather than 4%. Assume that the expected return on the market stays at 10%. Use the betas in Table.a. Calculate the expected return from Dell.b. Find the highest expected return ...The Treasury bill rate is 4%, and the expected return on the market portfolio is 12%. Using the capital asset pricing model:a. Draw a graph similar to Figure showing how the expected return varies with beta.b. What is the ...Many investment projects are exposed to diversifiable risks. What does “diversifiable” mean in this context? How should diversifiable risks be accounted for in project valuation? Should they be ignored completely?Look again at Table. This time we will concentrate on Burlington Northern.a. Calculate Burlington’s cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How different are your answers? ...Post your question