Reference no: EM133061376
1. What effect will diversifying your portfolio have on your returns and your level of risk?
2. (Expected rate of return and risk) Summerville, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better based on the risk (as measured by the standard deviation) and return of each?
Common Stock A Common Stock B Probability Return Probability Return
0.30 11% 0.20 -5%
0.40 15% 0.30 6%
0.30 19% 0.30 14%
0.20 22%
3.(Expected return, standard deviation, and capital asset pricing model) The following are the end-of-month prices for both the Standard & Poor's 500 Index and Nike's common stock.
a. Using the data here, calculate the holding-period returns for each of the months.
Nike S&P 500 Index 2014
May $76.91 $1,924
June 77.55 1,960
July 77.13 1,931
August 78.55 2,003
September 89.20 1,972
October 92.97 2,018
November 99.29 2,068
December 96.15 2,059
2015
January 92.25 1,995
February 97.12 2,105
March 100.33 2,068
April 98.84 2,086
May 104.43 2,128
b. Calculate the average monthly return and the standard deviation for both the S&P 500 and Nike.
c. Develop a graph that shows the relationship between the Nike stock returns and the S&P 500 Index. (Show the Nike returns on the vertical axis and the S&P 500 Index returns on the horizontal axis as done in Figure 6-5 .)
d. From your graph, describe the nature of the relationship between Nike stock returns and the returns for the S&P 500 Index.
4. (Portfolio beta and security market line) You own a portfolio consisting of the stocks below:
Stock OR Security Percentage Of Portfolio Beta Expected Return
1 20% 1.00 12%
2 30% 0.85 8%
3 15% 1.20 12%
4 25% 0.60 7%
5 10% 1.60 16%
The risk-free rate is 3 percent. Also, the expected return on the market portfolio is 11 percent.
a. Calculate the expected return of your portfolio. (Hint: The expected return of a portfolio equals the weighted average of the individual stocks' expected returns, where the weights are the percentage invested in each stock.)
b. Calculate the portfolio beta.
c. Given the foregoing information, plot the security market line on paper. Plot the stocks from your portfolio on your graph.
d. From your plot in part (c), which stocks appear to be your winners and which ones appear to be your losers?
e. Why should you consider your conclusion in part (d) to be less than certain?
5. (Portfolio beta) Assume you have the following portfolio.
Stock Stock Weight Beta
Apple 38% 1.50
Green Mountain Coffee 15% 1.44
Disney 27% 1.15
Target 20% 1.20
What is the portfolio's beta?
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