The return on stocks in a particular year was 18%. The return on bonds was 8%,...

  

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The return on stocks in a particular year was 18%. The return on bonds was 8%, and the return on Treasury bills (risk-free rate) was 6%. The standard deviation of stock returns during the year was 22%, the standard deviation of bond returns during the year was 7%, and the standard deviation of Treasury bill returns was zero. A 50-50 portfolio combination of stocks and bonds had a return of 13% and a standard deviation of 14%. a. Which of the three portfolios (stocks only, bonds only, and 50-50 stocks and bonds) is best when judged by the Sharpe (reward to risk) ratio? b. Should you conclude from the data that bonds are generally inferior to stocks and that your future portfolio should be composed only of stocks and Treasury bills> An investor can invest only in stocks A, B, or C or some combination of the three stocks (there is no borrowing or lending. She estimated the following properties of the three stocks: • EA = 25% A ● 15% EB 20% OB = 10% Ес 12% σε = 5% . = = Correlation A, B = 0.3 Correlation A,C = 0.4 Correlation BC = 0.8 = a. Find the expected rate of return and the risk of a portfolio where A makes up 40% of the total value, B makes up 50% of the portfolio, and C makes up 10% of the portfolio. b. Is the portfolio consisting of only A on the efficient frontier? Is a portfolio consisting of B on the efficient frontier? Is a portfolio consisting of only C on the efficient frontier? Explain your responses. (You can get the answer to part (b) from the answer to part (a) and the definition of the efficient frontier as composed of portfolios that are not dominated. Is portfolio A dominated? Is portfolio B dominated? Is portfolio C dominated? The answer to each might be yes, or no, or we need more information. Explain) The price of shares of ABC stock was • $60 on January 1, 2018 • $70 on January 1, 2019; and • $50 on January 1, 2020. Paul bought one share of ABC on January 1, 2018, four more on January 1, 2019, and sold all five shares on January 1, 2020. a. What is the annual arithmetic (time-weighted) average return on ABC stock during the two-year period? b. What is the annual geometric (time-weighted) average return on ABC stock during the two-year period? c. What is Paul's annual dollar-weighted average return during the two- year period? (To find the return, use Excel, a financial calculator, or trial and error. Using approximation is okay. Hint - Look for an integer between -21% and -25%). d. Why is Paul's annual dollar-weighted average return lower than the arithmetic and geometric time-weighted annual average return of ABC? The return on stocks in a particular year was 18%. The return on bonds was 8%, and the return on Treasury bills (risk-free rate) was 6%. The standard deviation of stock returns during the year was 22%, the standard deviation of bond returns during the year was 7%, and the standard deviation of Treasury bill returns was zero. A 50-50 portfolio combination of stocks and bonds had a return of 13% and a standard deviation of 14%. a. Which of the three portfolios (stocks only, bonds only, and 50-50 stocks and bonds) is best when judged by the Sharpe (reward to risk) ratio? b. Should you conclude from the data that bonds are generally inferior to stocks and that your future portfolio should be composed only of stocks and Treasury bills> An investor can invest only in stocks A, B, or C or some combination of the three stocks (there is no borrowing or lending. She estimated the following properties of the three stocks: • EA = 25% A ● 15% EB 20% OB = 10% Ес 12% σε = 5% . = = Correlation A, B = 0.3 Correlation A,C = 0.4 Correlation BC = 0.8 = a. Find the expected rate of return and the risk of a portfolio where A makes up 40% of the total value, B makes up 50% of the portfolio, and C makes up 10% of the portfolio. b. Is the portfolio consisting of only A on the efficient frontier? Is a portfolio consisting of B on the efficient frontier? Is a portfolio consisting of only C on the efficient frontier? Explain your responses. (You can get the answer to part (b) from the answer to part (a) and the definition of the efficient frontier as composed of portfolios that are not dominated. Is portfolio A dominated? Is portfolio B dominated? Is portfolio C dominated? The answer to each might be yes, or no, or we need more information. Explain) The price of shares of ABC stock was • $60 on January 1, 2018 • $70 on January 1, 2019; and • $50 on January 1, 2020. Paul bought one share of ABC on January 1, 2018, four more on January 1, 2019, and sold all five shares on January 1, 2020. a. What is the annual arithmetic (time-weighted) average return on ABC stock during the two-year period? b. What is the annual geometric (time-weighted) average return on ABC stock during the two-year period? c. What is Paul's annual dollar-weighted average return during the two- year period? (To find the return, use Excel, a financial calculator, or trial and error. Using approximation is okay. Hint - Look for an integer between -21% and -25%). d. Why is Paul's annual dollar-weighted average return lower than the arithmetic and geometric time-weighted annual average return of ABC?

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a To determine which portfolio is best when judged by the Sharpe ratio we need to calculate the Sharpe ratio for each portfolio The Sharpe ratio is calculated as the excess return of the portfolio por... View the full answer