Consider the following expected returns, volatilities, and correlations: Stock Expected Return Standard Deviation Correlation with IBM Correlation
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Question:
Consider the following expected returns, volatilities, and correlations:
Stock | Expected Return | Standard Deviation | Correlation with IBM | Correlation with Alphabet |
IMB | 3% | 5% | 1.0 | -1.0 |
Alphabet | 10% | 20% | -1.0 | 1.0 |
- Consider a portfolio consisting of only IBM and Alphabet. Calculate the percentage of your investment (portfolio weight) that you would place in IBM stock to achieve a risk-free investment. Show all your work.
- Based on your finding in Part (a), what is the expected return of your portfolio? What is the risk-free rate in this market, assuming the market is efficient and perfect?
- Consider a portfolio consisting of only IBM and Alphabet. Calculate the expected return and standard deviation on such a portfolio when the weight on IBM stock is 60%, 80%, and 100%.
- Based on your answer in Part (c), identify the efficient portfolios consisting of only IBM and Alphabet, when the weight on IBM stock is 60%, 80%, and 100%.
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1305637108
6th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
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