What are the characteristics of an efficient portfolio

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Reference no: EM132731722

Question 1 Two stocks (A and B) have a covariance of 23. When combined in equal proportions into portfolio Y, the variance of the portfolio is 30.25. Stock A has a variance twice that of Stock B. Another portfolio (X) has an expected return of 17% and a variance of 50.

Additional Information
The expected return on the market is 15% and the risk free rate is 7%
Covariance (A,Market) = 22 and Covariance (B,Market) = 15.5
Variance of the Market is 15

Required:
a) Variance of Stock A and the variance of Stock B.
b) The correlation of Stock A with Stock B
c) Is portfolio Y efficient? Explain.
d) What is the expected return of portfolio Y?
e) Without doing any calculations, is portfolio X efficient? Explain.
f) What are the characteristics of an efficient portfolio? List at least 3 or 4.

Question 2 a) Your portfolio contains 60% of Bond I and 40% of Bond II. Details of the two bonds are given below:
I. 10-year zero coupon government bond, par value $1000, current price = $613.91
II. 10-year zero coupon corporate bond, par value $1000, default premium= 2%
Find the price of Bond II.
Find the convexity of Bond I.

Question 3 You have just secured a portfolio analyst job with a major equity fund. You have found it difficult to focus on more than 30 stocks which have been drawn from several industries. A client has come to you and said to forget about the 30 stocks and concentrate solely on 5 stocks. You need to respond to the client. In your response you must only respond within the context of modern portfolio theory.

Required:
a) Contrast the concepts of systematic risk and firm-specific risk and give examples of each type of risk.

b) Critique the client suggestion. Discuss what factors are most important in selecting stocks for a portfolio.

Reference no: EM132731722

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