Consider the following two assets: J+D Chili stock, with expected return 6% and standard deviation 42%...

 

  

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Consider the following two assets: J+D Chili stock, with expected return 6% and standard deviation 42% Maryanne's Hammocks stock, with expected return 2% and standard deviation 17%. The correlation between J+D Chili stock and Maryanne's Hammocks stock returns is -0.1. The table below indicates the expected return and the standard deviation for portfolios that put weight w on J+D Chili stock and weight 1-w on Maryanne's Hammocks stock. (a) (3 points) Complete the table above. (b) (4 points) Draw the portfolio opportunity set associated with these assets. Clearly indicate each asset along with the three portfolios from the table. La- bel the region that corresponds to short selling J+D Chili stock with the label "SHORT J+D" and the region that corresponds to selling Maryanne's Ham- mocks short with the label "SHORT MARYANNE" (c) (2 points) Highlight or otherwise distinguish the efficient portion of the port- folio opportunity set. (d) (4 points) For w=-0.5, how much money would be invested in each asset? = folio opportunity set. (d) (4 points) For w -0.5, how much money would be invested in each asset? What would be the dollar value of the standard deviation of returns to your portfolio? Describe the procedure you would use to create this negative weight on J+D Chili stock. (e) (3 points) FROM NOW ON, consider a risk-free asset with return 3%, and ignore Maryanne's Hammock stock entirely. Draw the portfolios that can be created by combinations of J+D Chili stock and the risk-free asset. Label each asset and the short-selling regions. (f) (2 points) In a portfolio that puts weights v on J+D Chili stock and weight 1 v on the risk-free asset, find v such that the standard deviation of the portfolio return equals 63%. (g) (2 points) Considering again portfolios with weight u on J+D Chili stock and weight 1-v on the risk-free asset, what is the range of v such that the expected return of the portfolios is negative? Table 1: Weight Expected Return Standard Deviation w = 0.8 5.2% w = 0.5 w = 0.1 21.85% 15.46% Consider the following two assets: J+D Chili stock, with expected return 6% and standard deviation 42% Maryanne's Hammocks stock, with expected return 2% and standard deviation 17%. The correlation between J+D Chili stock and Maryanne's Hammocks stock returns is -0.1. The table below indicates the expected return and the standard deviation for portfolios that put weight w on J+D Chili stock and weight 1-w on Maryanne's Hammocks stock. (a) (3 points) Complete the table above. (b) (4 points) Draw the portfolio opportunity set associated with these assets. Clearly indicate each asset along with the three portfolios from the table. La- bel the region that corresponds to short selling J+D Chili stock with the label "SHORT J+D" and the region that corresponds to selling Maryanne's Ham- mocks short with the label "SHORT MARYANNE" (c) (2 points) Highlight or otherwise distinguish the efficient portion of the port- folio opportunity set. (d) (4 points) For w=-0.5, how much money would be invested in each asset? = folio opportunity set. (d) (4 points) For w -0.5, how much money would be invested in each asset? What would be the dollar value of the standard deviation of returns to your portfolio? Describe the procedure you would use to create this negative weight on J+D Chili stock. (e) (3 points) FROM NOW ON, consider a risk-free asset with return 3%, and ignore Maryanne's Hammock stock entirely. Draw the portfolios that can be created by combinations of J+D Chili stock and the risk-free asset. Label each asset and the short-selling regions. (f) (2 points) In a portfolio that puts weights v on J+D Chili stock and weight 1 v on the risk-free asset, find v such that the standard deviation of the portfolio return equals 63%. (g) (2 points) Considering again portfolios with weight u on J+D Chili stock and weight 1-v on the risk-free asset, what is the range of v such that the expected return of the portfolios is negative? Table 1: Weight Expected Return Standard Deviation w = 0.8 5.2% w = 0.5 w = 0.1 21.85% 15.46%