# Question: You are interested in creating a

You are interested in creating a portfolio of two stocks—Coca Cola and Texas Utilities. Over the last decade, an investment in Coca Cola stock would have earned an average annual return of 25%, with a standard deviation in returns of 36%. An investment in Texas Utilities stock would have earned an average annual return of 12%, with a standard deviation of 22%. The correlation in returns across the two stocks is 0.28.

a. Assuming that the average and standard deviation, estimated using past returns, will continue to hold in the future, estimate the average returns and standard deviation of a portfolio composed 60% of Coca Cola and 40% of Texas Utilities stock.

b. Estimate the minimum variance portfolio.

c. Now assume that Coca Cola’s international diversification will reduce the correlation to 0.20, while increasing Coca Cola’s standard deviation in returns to 45%. Assuming all of the other numbers remain unchanged, answer (a) and (b).

a. Assuming that the average and standard deviation, estimated using past returns, will continue to hold in the future, estimate the average returns and standard deviation of a portfolio composed 60% of Coca Cola and 40% of Texas Utilities stock.

b. Estimate the minimum variance portfolio.

c. Now assume that Coca Cola’s international diversification will reduce the correlation to 0.20, while increasing Coca Cola’s standard deviation in returns to 45%. Assuming all of the other numbers remain unchanged, answer (a) and (b).

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

Assume that you have half of your money invested in Times Mirror, the media company, and the other half invested in Unilever, the consumer product giant. The expected returns and standard deviations on the two investments ...You run a regression of monthly returns of Mapco, an oil-and gas-producing firm, on the S&P 500 Index and come up with the following output for the period 1991–1995. Intercept of the regression = 0.06% X-coefficient of the ...Boise Cascade also had debt outstanding of $1.7 billion and a market value of equity of $1.5 billion; the corporate marginal tax rate was 36%. a. Assuming that the current beta of 0.95 for the stock is a reasonable one, ...Safecorp, which owns and operates grocery stores across the United States, currently has $50 million in debt and $100 million in equity outstanding. Its stock has a beta of 1.2. It is planning a leveraged buyout, where it ...You have to pick between three mutually exclusive projects with the following cash flows to the firm: The cost of capital is 12%. a. Which project would you pick using the NPV rule? b. Which project would you pick using the ...Post your question