1. Diamond/Edward Economic Probability Diamond Edward Boom 0.3 10% -12% Normal 0.5 7% 4% Recession 0.2...

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1. Diamond/Edward Economic Probability Diamond Edward Boom 0.3 10% -12% Normal 0.5 7% 4% Recession 0.2 -3% 25% The risk free return is 3% a) What are the expected return and risk levels for each of the above three investments? | b) If you were to construct a portfolio consisting of 40% of your funds in T-bills and 60% of your funds in Diamond, what would the portfolio risk and return be? c) If you were to construct a portfolio of 30% Diamond and 70% Edward, what would the expected return of this portfolio be d) What are the Covariance and Correlation Coefficient between Diamond and Edward? e) What would the risk level of the portfolio in question (c) be? f) What the WD and WE of the optimum risky portfolio and the Minimum Variance Portfolio? 2. The correlation coefficient between ABC stock and XYZ stock is -.76. What does this mean for a portfolio that contains these two stocks? What does correlation coefficient measure? 3. Explain the difference between a correlation of 1 and a correlation of -1. 4. If two stocks have the following attributes, calculate their correlation coefficient. Stock 1 : Expected Return 10% Standard Deviation 6% Stock 2: Expected Return 16% Standard Deviation 8% Covariance: -40.48 5. Given the following information, calculate the expected return of the stock and bond funds, their standard deviations, and their correlation coefficient. (The covariance between the two funds is -156) Returns Probability Stock Fund Bond Fund Recession .4 -9% 17% Normal .2 12% 7% Boom .4 30% -3% 1. Diamond/Edward Economic Probability Diamond Edward Boom 0.3 10% -12% Normal 0.5 7% 4% Recession 0.2 -3% 25% The risk free return is 3% a) What are the expected return and risk levels for each of the above three investments? | b) If you were to construct a portfolio consisting of 40% of your funds in T-bills and 60% of your funds in Diamond, what would the portfolio risk and return be? c) If you were to construct a portfolio of 30% Diamond and 70% Edward, what would the expected return of this portfolio be d) What are the Covariance and Correlation Coefficient between Diamond and Edward? e) What would the risk level of the portfolio in question (c) be? f) What the WD and WE of the optimum risky portfolio and the Minimum Variance Portfolio? 2. The correlation coefficient between ABC stock and XYZ stock is -.76. What does this mean for a portfolio that contains these two stocks? What does correlation coefficient measure? 3. Explain the difference between a correlation of 1 and a correlation of -1. 4. If two stocks have the following attributes, calculate their correlation coefficient. Stock 1 : Expected Return 10% Standard Deviation 6% Stock 2: Expected Return 16% Standard Deviation 8% Covariance: -40.48 5. Given the following information, calculate the expected return of the stock and bond funds, their standard deviations, and their correlation coefficient. (The covariance between the two funds is -156) Returns Probability Stock Fund Bond Fund Recession .4 -9% 17% Normal .2 12% 7% Boom .4 30% -3%

Answer rating: 100% (QA)

1 a Expected Return and Risk Levels for the Investments Diamond Expected Return 03 12 05 7 02 3 18 Risk Level Standard Deviation 03 12 182 05 7 182 02 3 182 10 Edward Expected Return 03 12 05 4 02 25 ... View the full answer