a. 30.00% b. -6.25% c. 3.00% d. 10.05% a. $14 million b. $17 million c. $20 mill

Question

     a. 30.00%
     b. -6.25%
     c. 3.00%
     d. 10.05%

     a. $14 million
     b. $17 million
     c. $20 million
     d. $28 million

1. An investor plans to invest 75 percent of her funds in the common stock of Mickey Company and 25 percent in Mini Company. The expected return on Mickey is 16 percent and the expected return on Mini is 12 percent. The standard deviation of returns for Mickey is 20 percent and for Mini is 15 percent. The correlation between the returns for Mickey and Mini is -0.4 (negative 0.4). Determine the standard deviation of returns for this investor's portfolio.        a, 15.63%
       b. 11.33%
       c. 21.76%
       d. 13.93%

Explanation / Answer

1.

1. standard deviation of returns = sqrt (w2A*?2(RA) + w2B*?2(RB) + 2*(wA)*(wB)*Cov(RA, RB))

standard deviation of returns = sqrt(0.75^2*0.2^2 + 25%^2*15%^2 +2*0.75*0.25*0.2*0.15*(-0.4))= 13.93%

4. 13.93%

2

.

3. 3.00%

expected rate of return on Seattle Best Stock = 0.55*-12.5% + 0.30*12.50%+ 0.13*37.5% + 0.02*62.5%= 3.00%

3.

2. 17 million

4. e. II and III

5. a. I and IV

Explanation- II. The beta of the market portfolio is 0. - Wrong because beta of the market portfolio is 1

III. A stock with a beta of zero would be expected to have a rate of return equal to zero. - wrong because it will have return equal to risk free return

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