Question: Based on historical data, you have estimated the following probability distributions for the returns on two individual securities (SMALL and BIG) and the value-weighted market

Based on historical data, you have estimated the following probability distributions for the returns on two individual securities (SMALL and BIG) and the value-weighted market portfolio:

StateprobabilitySmallBigMarket

Expansion0.3025%8%12%

Normal0.5015%6%10%

Recession0.200%2%3%

a)Calculate the expected return and standard deviation of return for Small, Big and the market portfolio

b)Calculate the covariance between Small and Big; between Small and the market, and between Big and the market.

c)Calculate the expected return and standard deviation of return for a portfolio that consists of Big and Small.

d)Calculate the expected return and standard deviation of return for a portfolio that consists of 3/4 Big and 1/4 Small.

e)Compare the five investment opportunities:the two portfolios in c) and d), the individual securities Small and Big, and the market portfolio.Without performing any calculations, can you recommend buying (or not buying) any of these investments?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Based on historical data, you have estimated the following probability distributions for the returns on two individual securities (SMALL and BIG) and the value-weighted market portfolio:...

PLease solve all the question 2.The investment opportunity set above has been enhanced by the inclusion of a risk-free investment that pays 1%. Does access to this asset change your answer to 1e)...

Only part b of Question 1., and Question 2. PLease! Based on historical data, you have estimated the following probability distributions for the returns on two individual securities (SMALL and BIG)...

Based on historical data, you have estimated the following probability distributions for the returns on two individual securities (SMALL and BIG) and the value-weighted market portfolio: State...

1.Based on historical data, you have estimated the following probability distributions for the returns on two individual securities (SMALL and BIG) and the value-weighted market portfolio:...

Please solve Only Question No. 3. Please give full explanation and all the relevant steps for Question No. 3 Question No. 3. .What is the beta of Small in the problem above? What is the beta of Big?...

Now apply the replacement chain approach to determine the projects extended NPVs. Which project should be chosen?

A) 69.6 b) 69 c)70 d)77.5 Health care issues are receiving much attention in both academic and political areas. A sociologist recently conducted a survey of senior citizens whose net worth is too...

1 1 - 1 7 In a properly designed purchasing process, the same employee most likely would match vendors invoices with receiving reports and Post the detailed accounts payable records. Recompute the...

On January 1, the company purchased the rights to a valuable Internet domain name for $250,000. Given current market conditions, the company estimates that these rights have an economic life of four...

(a) Show that 0f (U) du = 1, where f (U) is the Maxwell-Boltzmann distribution of Eq. (18.32). (b) In terms of the physical definition of f (U), explain why the integral in part (a) must have this...

On January 1 the company purchased the rights to a valuable Internet domain name for $300,000. Given current market conditions, the company estimates that these rights have an economic life of five...

Refer to the clustering problem involving the file FBS described in Problem 1. a. Apply hierarchical clustering with 10 clusters using latitude and longitude as variables. Be sure to Normalize input...

Suppose that IBM employs a network of expert analytics consultants for various projects. To help it determine how to distribute its bonuses, IBM wants to form groups of employees with similar...

Tori and some other childeen experimented with balls to see which ones rolled. First using a piece of cardboard to use as a ramp, they angled it on a block to the floor to test the balls. Then Tori...

Does the existence of poverty imply that our socioeconomic system is unjust? Does the concentration of poverty in certain groups make it more unjust than it would be othe1Wise?

Assess tile concept of eminent domain, in general, and the plight of Susette Keio and her neighbors, in particular, from the point of view of the different theories of Justice discussed in this...

Would Nestte's pumping 262 million gallons of water per year from Sanctuary Spring constiMe "reasonable use"? Is the company treating either local residents or the Native American bibes unfairly, or...