Reference no: EM132909676
Show your work in detailed format. Expected Monthly Returns Standard
Deviation of Monthly Returns
Original Portfolio 0.67 2.37%
Company 1.25 2.95
Maria Drewer has a well diversified $900,000 portfolio. She then receives $100,000 in common shares from ABC Company. Her financial advisor gave her the following figures as an estimate:
The correlation coefficient between the returns of ABC stocks and the returns of the original portfolio is.40.
a.Maria's total portfolio has changed as a result of the bequest, and she is debating whether or not to maintain the ABC stock. Calculate the following assumingMaria maintains the ABC stock:
i. Her new portfolio's expected return, which includes the ABC stock.
ii. The correlation between the returns of ABC stocks and the returns of the original portfolio.
iii. Her new portfolio's standard deviation, which contains the ABC stock.
a. IfMaria sells the ABC stock, the profits will be invested in risk-free treasury notes yielding.
The monthly rate is 42 percent. Calculate the following ifMaria trades the ABC stock and substitutes it with government securities:
i. Her new portfolio's expected return, which includes government securities.
ii. The correlation between the returns on government securities and the returns on the original portfolio.
iii. Her new portfolio's standard deviation, which includes government securities.
c. Determine if her new portfolio's beta, which includes government securities, will be greater or lower than her previous portfolio's beta.
Grace is contemplating selling $100,000 of ABC stock and buying $100,000 of XYZ Company common shares instead, based on discussion with her husband. The anticipated return and standard deviation of XYZ stock are the same as those of ABC stock. "It doesn't matter whether you maintain all of the ABC stock or replace it with $100,000 of XYZ stock," her husband says. Give your opinion on whether her husband's remark is right or not. Justify your answer.
g. In a recent conversation with her financial advisor,Maria said, "I'll be content if I don't lose revenue in my portfolio." "I am more anxious about incurring losses than I am with earning great returns," she said. Describe one flaw in utilizing the standard deviation of returns as a risk indicator forMaria.