Suppose you are interested in forming a portfolio consisting of two risky securities, securities A and...

 

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Suppose you are interested in forming a portfolio consisting of two risky securities, securities A and B. Here are their respective return distributions (note: ps corresponds to the probability that state s occurs, whereas ras and the correspond to the state-contingent returns on securities A and B): Ps Tas Tbs 20% 0% 8% 20% 5% 0% 20% 8% 5% 20% 10% 10% 20% 20% 0% A. (10 points) What are the expected returns for securities A and B? B. (10 points) What are the standard deviations for the returns on securities A and B? C. (5 points) What is the correlation between returns on securities A and B? D. (10 points) What is the expected return and standard deviation for an equally weighted portfolio consisting of securities A and B? E. (10 points) Suppose securities C and D have the same expected returns and standard deviations as securities A and B, but are uncorrelated. What is the expected return and standard deviation for an equally weighted portfolio consisting of securities C and D? F. (5 points) Explain why the portfolio consisting of securities C and D is riskier than the portfolio consisting of securities A and B. Suppose you are interested in forming a portfolio consisting of two risky securities, securities A and B. Here are their respective return distributions (note: ps corresponds to the probability that state s occurs, whereas ras and the correspond to the state-contingent returns on securities A and B): Ps Tas Tbs 20% 0% 8% 20% 5% 0% 20% 8% 5% 20% 10% 10% 20% 20% 0% A. (10 points) What are the expected returns for securities A and B? B. (10 points) What are the standard deviations for the returns on securities A and B? C. (5 points) What is the correlation between returns on securities A and B? D. (10 points) What is the expected return and standard deviation for an equally weighted portfolio consisting of securities A and B? E. (10 points) Suppose securities C and D have the same expected returns and standard deviations as securities A and B, but are uncorrelated. What is the expected return and standard deviation for an equally weighted portfolio consisting of securities C and D? F. (5 points) Explain why the portfolio consisting of securities C and D is riskier than the portfolio consisting of securities A and B.

Answer rating: 100% (QA)

ANSWERS A The expected returns for securities A and B are 25 and 10 respectively B The standard deviations for the returns on securities A and B are 5 ... View the full answer