Question: You expect HGH stock to have a 20% return next year and a 30% volatility. You have $25,000 to invest, but plan to invest a

You expect HGH stock to have a 20% return next year and a 30% volatility. You have $25,000 to invest, but plan to invest a total of $50,000 in HGH, raising the additional $25,000 by shorting either KBH or LWI stock. Both KBH and LWI have an expected return of 10% and a volatility of 20%. If KBH has a correlation of +0.5 with HGH, and LWI has a correlation of -0.50 with HGH, which stock should you short?

Step by Step Solution

★★★★★

3.40 Rating (150 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

Either strategy has expected return of 220 110 ... View full answer

Question Has Been Solved by an Expert!

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

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

317-B-C-F-G-F (390).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

You plan to invest in Stock X, Stock Y, or some combination of the two. The expected return for X is 10% and X = 5%. The expected return for Y is 12% and Y = 6%. The correlation coefficient, rXY, is...

For solving Ax = b, consider the stationary Richardson iteration Xk+1=Xk+a (b Ax). For this question, we assume that all eigenvalues of A are real. (a) Find the iteration matrix. (b) Show that if...

You plan to invest in a hedge fund that has total capital of $500 million invested in five stocks: The risk-free rate is 6%, and you believe that the following probability distribution for future...

You expect HGH stock to have a 20% return next year and a 45% volatility. You have $25,000 to invest, but plan to invest a total of $50,000 in HGH, raising the additional $25,000 by shorting either...

13. You expect HGH stock to have a 20% return next year and a 45% volatility. You have $25,000 to invest, but plan to invest a total of $50,000 in HGH, raising the additional $25,000 by shorting...

You expect Volvo stock to have a 20% return next year and a 30% volatility. You have 25,000 SEK to invest, but plan to invest a total of 50,000 SEK in Volvo, raising the additional 25,000 SEK by...

You expect HGH stock to have a 15% return next year and a 35% volatility. You have $100,000 to invest, but plan to invest a total of $125,000 in HGH, raising the additional $25,000 by shorting either...

Using the information provided in RE8 4, prepare the journal entry' to record the reductions to market for Paul Corporation assuming that it uses the allowance method instead of the direct method.

You have been hired as a consultant for a company facing an IRS audit of their accounting records. During your review, you notice anomalies in the payroll system involving overpayments of labor and...

3 . What considerations should apply when you need to manage schedule adjustments and resource reallocations? What are the best approaches to doing this in practice? ( 1 0 )

Use the method of Archimedes and a regular polygon with 12 side to approximate the value of T

Sharon Fox decided to buy a home in Marblehead, Massachusetts, for $266,000. Her bank requires a 20% down payment. Sue Willis, an attorney, has notified Sharon that besides the 20% down payment there...

Consider the following scalar discrete-time control sys- tem x(k +1) = -3x(k) + u(k) where x E R, u ER and x(0) = -1. Let N > 1 be some integer. (a) Consider the following cost function N J =Eu(k)....

Why may convertible bonds be called by the fi rm? When are these bonds most likely to be called?

What is the intuition behind valuation by multiples and what are the major assumptions?

What are the limitations of valuation by multiples?

How do interactions in a market lead to information being incorporated into stock prices?

You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions of dollars) of its profits and of its future investments in new plant and working capital: Year 1 2 3...

a) Identify and describe one (1) source of financing you could explore to raise capital, providing a recent 'real world' example to support your answer ( 3 marks) b) Two firms are looking to borrow...

remember a bond's coupon will/might reflects the return that a bonholder would like/is obligated when the bond's coupon rate is greater be less than/equal/exceed when the bond's coupon rate is less...