Problem 1-Optimal Risky Portfolios [10 marks] The correlation coefficients between different stocks are provided in the...
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Problem 1-Optimal Risky Portfolios [10 marks] The correlation coefficients between different stocks are provided in the following table: MSFT TSLA NVDA MCD MSFT 1 TSLA 0.36 1 NVDA 0.75 0.41 1 MCD 0.19 0.25 0.23 1 Assume all stocks have an expected return of 5.50% and a standard deviation of 15.36%. Use this information to answer the following questions: a) Jane is one of your clients. She is risk averse, with a risk aversion parameter A = 3, and she is fully invested in TSLA. She can only add one more stock to her portfolio. Which stock would you recommend? Why? [2 marks] b) Joe is also one of your clients and he is in the same situation as Jane; that is, he is fully invested in TSLA and he can only add one more stock to his portfolio. However, Joe is more risk averse than Jane. Would you advise Joe differently than Jane? That is, would your recommendation in part (a) change in this case? Why? [2 marks] c) Martin is risk neutral and he is fully invested in MSFT. He can add one or more stocks to his portfolio. Is there a particular stock or combination of stocks that would be better for him? Why? [2 marks] d) Consider once again the situation in part (a), but now suppose that in addition to the stocks in the table, Jane can also invest in T-bills that yield 5.50%. Would your recommendation to Jane change in this case? Should she hold any stocks? [2 marks] e) Consider once again the situation in part (b), but now suppose that in addition to the stocks in the table, Joe can also invest in T-bills that yield 3.60%. Should he hold any stocks? [2 marks] Problem 1-Optimal Risky Portfolios [10 marks] The correlation coefficients between different stocks are provided in the following table: MSFT TSLA NVDA MCD MSFT 1 TSLA 0.36 1 NVDA 0.75 0.41 1 MCD 0.19 0.25 0.23 1 Assume all stocks have an expected return of 5.50% and a standard deviation of 15.36%. Use this information to answer the following questions: a) Jane is one of your clients. She is risk averse, with a risk aversion parameter A = 3, and she is fully invested in TSLA. She can only add one more stock to her portfolio. Which stock would you recommend? Why? [2 marks] b) Joe is also one of your clients and he is in the same situation as Jane; that is, he is fully invested in TSLA and he can only add one more stock to his portfolio. However, Joe is more risk averse than Jane. Would you advise Joe differently than Jane? That is, would your recommendation in part (a) change in this case? Why? [2 marks] c) Martin is risk neutral and he is fully invested in MSFT. He can add one or more stocks to his portfolio. Is there a particular stock or combination of stocks that would be better for him? Why? [2 marks] d) Consider once again the situation in part (a), but now suppose that in addition to the stocks in the table, Jane can also invest in T-bills that yield 5.50%. Would your recommendation to Jane change in this case? Should she hold any stocks? [2 marks] e) Consider once again the situation in part (b), but now suppose that in addition to the stocks in the table, Joe can also invest in T-bills that yield 3.60%. Should he hold any stocks? [2 marks]
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Related Book For
Understanding Basic Statistics
ISBN: 9781111827021
6th Edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase
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