You are provided with the following sample observations relating to historical rate of returns and their...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are provided with the following sample observations relating to historical rate of returns and their corresponding probabilities for individual assets, Brad and Ford: Obs 1 2 3 4 5 67890 10 Brad E(RB) -0.03 0.07 0.10 0.11 0.02 0.15 Prob 0.01 0.09 0.10 0.20 0.05 0.25 0.08 0.05 0.09 0.10 0.12 0.10 0.05 0.05 Obs 1 2 3 4 5 6 7 8 9 10 Ford E(RF) -0.01 0.10 0.15 0.20 0.08 0.25 0.13 0.09 0.11 0.06 Prob 0.01 0.09 0.10 0.20 0.05 0.25 0.05 0.10 0.10 0.05 Required: Based on the following information (Note: You can use Microsoft Excel functions to expedite your calculations. Please show answers up to two digits after decimal point): a) Calculate the expected rate of return for each individual asset. b) Calculate the standard deviation of returns for each individual asset. (4 marks) (4 marks) c) Assume that the correlation coefficient between the two assets is -1 (perfectly negatively correlated). Calculate the weighted average rate of returns and standard deviation of returns for the hypothetical portfolios containing the combination of the two assets in varying weights as indicated below. Then, choose a recommended portfolio. Summarize your answers in the following table. For example, for Brad - Ford portfolio: Portfolio 1 2 3 4 5 6 7 8 9 10 11 Brad 1.0 0.9 0.8 0.7 0.6 Weight 0.5 0.4 0.3 0.2 0.1 0.0 Ford 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Weighted average rate of return Standard deviation of returns Recommended portfolio (please tick √ only one) O For each of the portfolios in (c) above, plot the portfolio risk-return for different weights of assets (Note: For the risk-return plots, return is on vertical axis and risk is on horizontal axis). e) Discuss what do you learn from this analysis including factors to be considered in choosing a preferred portfolio. You are provided with the following sample observations relating to historical rate of returns and their corresponding probabilities for individual assets, Brad and Ford: Obs 1 2 3 4 5 67890 10 Brad E(RB) -0.03 0.07 0.10 0.11 0.02 0.15 Prob 0.01 0.09 0.10 0.20 0.05 0.25 0.08 0.05 0.09 0.10 0.12 0.10 0.05 0.05 Obs 1 2 3 4 5 6 7 8 9 10 Ford E(RF) -0.01 0.10 0.15 0.20 0.08 0.25 0.13 0.09 0.11 0.06 Prob 0.01 0.09 0.10 0.20 0.05 0.25 0.05 0.10 0.10 0.05 Required: Based on the following information (Note: You can use Microsoft Excel functions to expedite your calculations. Please show answers up to two digits after decimal point): a) Calculate the expected rate of return for each individual asset. b) Calculate the standard deviation of returns for each individual asset. (4 marks) (4 marks) c) Assume that the correlation coefficient between the two assets is -1 (perfectly negatively correlated). Calculate the weighted average rate of returns and standard deviation of returns for the hypothetical portfolios containing the combination of the two assets in varying weights as indicated below. Then, choose a recommended portfolio. Summarize your answers in the following table. For example, for Brad - Ford portfolio: Portfolio 1 2 3 4 5 6 7 8 9 10 11 Brad 1.0 0.9 0.8 0.7 0.6 Weight 0.5 0.4 0.3 0.2 0.1 0.0 Ford 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Weighted average rate of return Standard deviation of returns Recommended portfolio (please tick √ only one) O For each of the portfolios in (c) above, plot the portfolio risk-return for different weights of assets (Note: For the risk-return plots, return is on vertical axis and risk is on horizontal axis). e) Discuss what do you learn from this analysis including factors to be considered in choosing a preferred portfolio.
Expert Answer:
Answer rating: 100% (QA)
Lets start by calculating the expected rate of return and the standard deviation for each individual ... View the full answer
Related Book For
Accounting Principles
ISBN: 978-0470533475
9th Edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
Posted Date:
Students also viewed these finance questions
-
3) Write a code to perform the following:- A) Set bit 7 (the most significant bit) of memory location $1000 and leave the other bits unaffected. B) Clear bit 0 (the least significant bit) of memory...
-
A survey of information systems managers was used to predict the yearly salary of beginning programmer/analysts in a metropolitan area. Managers specified their standard salary for a beginning...
-
. A vertical pole that is 2 meters tall casts a shadow that is 1.5 meters long. Nearby, at the same time, another vertical pole casts a shadow that is 6.5 meters long. How tall is this pole? a. Make...
-
At Blossom Company, events and transactions during 2020 included the following. The tax rate for all items is 20%. (1) Depreciation for 2018 was found to be understated by $148000. (2) A strike by...
-
The reaction of 2-bromobutane with ethoxide ion in ethanol gives 81% of a mixture of (Z)- and (E)-2-butene. Explain which stereo isomer you expect to predominate in this mixture.
-
Explain how and to what extent combinatorial problems can be solved using resolution.
-
Use the coefficients of the multiple regression equation in Figure 13.5 to predict the lung capacity for a 10-year-old who is 57 inches tall and weighs 90 pounds, at a pressure of 30.2 inches and a...
-
Determine (a) The x, y, and z components of the 900-N force, (b) The angles θx, θy, and θz that the force forms with the coordinate axes. SK)N 1000 N N (O6 70
-
The city of Las Americas is dissatisfied with the private ambulance services. The city decided to purchase an ambulance operating contract and started operation of a municipal emergency medical...
-
Risk and Probability Dianne Hospitality is considering the purchase of one of two cooking units, A and B, for its pub in the Lake District region of UK. Each of the units requires an initial...
-
For each string of data below, determine the EDC bit if single-bit odd parity is used, and calculate the percent increase in the message length. a) 0010 11012 b) 1101 01102 c) 1100 1111 0101 11012 d)...
-
The principles of feedback and control are not restricted to engineering and biological systems. There are many applications and occurrences of feedback control concepts in the socioeconomic and...
-
How can people process capability be built and why is it important?
-
Describe the strategy execution void and the relative importance of strategy versus execution.
-
Will the BPM maturity of the organization impact the implementation of BPM and, if so, why?
-
Consider Table 10.1, which has data on insurance status and medical expenditures for different types of professors at Adverse Selection University (ASU). In 2014, every employee of ASU was offered a...
-
Mabel, the owner of Mabels Bridal Boutique, is concerned about the current and future cash flow position of her business. While attending a business seminar she learnt about cash budgets and their...
-
Flicker, Inc., a closely held corporation, acquired a passive activity this year. Gross income from operations of the activity was $160,000. Operating expenses, not including depreciation, were...
-
Jims Hat Shop received a shipment of hats for which it paid the wholesaler $2,970. The price of the hats was $3,000 but Jims was given a $30 cash discount and required to pay freight charges of $50....
-
Rodriquez Company has the following payroll procedures. (a) Supervisor approves overtime work. (b) The human resources department prepares hiring authorization forms for new hires. (c) A second...
-
Windsor Advertising Companys trial balance at December 31 shows Advertising Supplies $6,700 and Advertising Supplies Expense $0. On December 31, there are $2,700 of supplies on hand. Prepare the...
-
The adjusted trial balance of Marshall Ltd. at December 31, 2020. Requirements 1. Prepare Marshall Ltd.'s 2020 income statement, statement of retained earnings, and balance sheet. List expenses...
-
Fred's Catering Ltd. had the following selected transactions during May 2020: Requirements 1. Show how each transaction would be handled using the cash basis and the accrual basis, Under each column,...
-
The balance sheet at December 31, 2018, 2019) and 2020 and income statement for the years ended December 31, 2018, 2019, and 2020 for Ojibway Inc. include the following data: Requirements Use the...
Study smarter with the SolutionInn App