You plan to invest in Stock X, Stock Y, or some combination of the two The expected return for X is 10 and X 5 The expected return for Y is 12 and Y 6 The correlation coefficient, rXY, is 0 75 a Calculate rp and p for 100 , 75 , 50 , 25 , and 0 in Stock X b Use the values you calculated for rp and ...

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You plan to invest in Stock X, Stock Y, or some combination of the two. The expected

Question:

You plan to invest in Stock X, Stock Y, or some combination of the two. The for X is 10% and X = 5%. The for Y is 12% and Y = 6%. The correlation coefficient, rXY, is 0.75.
a. Calculate rp and p for 100%, 75%, 50%, 25%, and 0% in Stock X.
b. Use the values you calculated for rp and 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 comprised of X and Y. Let an indifference curve be tangent to the efficient set at the point where rp = 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 rM = 12%, M = 4%, and rRF = 6%. What would be the required and on a with P = 10%?
e. Suppose the correlation of Stock X with the market, rXM, is 0.8, while rYM = 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 X and Y? Do these appear to be in equilibrium?
If not, what would happen to bring about an equilibrium?

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