Raybrooks Co. stock has an annual return mean and standard deviation of 12 perce

Question

Raybrooks Co. stock has an annual return mean and standard deviation of 12 percent and 29 percent, respectively. Joi, Inc., stock has an annual return mean and standard deviation of 13 percent and 32 percent, respectively.

Your portfolio allocates equal funds to the Raybrooks Co.and Joi, Inc., stocks.

The return correlation between Raybrooks Co. and Joi, Inc., is 0.2. What is the smallest expected loss, in percentages, for your portfolio in the coming month with a probability of 2.5 percent?

(Note: Use 1.96 as the multiple in your probability statement.)

PLEASE SHOW ALL WORK

Explanation / Answer

E(R) = [0.12 + 0.13] / 2 = 0.125

? = [(0.52 x 0.292) + (0.52 x 0.322)]1/2

= [0.0210 + 0.0256]1/2

= 0.0466251/2 = 0.2159

Prob(R ? 0.125 – 1.960(0.2159)) = 2.5%

Prob(R ? –0.2982) = 2.5%

Smallest Expected Loss = -29.82%

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.