****PLEASE INCLUDE SOLUTIONS TO EACH SUB QUESTIONS AND THOROUGHLY EXPLAIN EACH S
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****PLEASE INCLUDE SOLUTIONS TO EACH SUB QUESTIONS AND THOROUGHLY EXPLAIN EACH STEP!!! **Preferably in excel document
a. Calculate the variance of the annual return on a portfolio with equal investments in each stock.
b. Calculate the beta of each stock in the table relative to a portfolio with equal investments in each stock.
c. Suppose you can invest in only two of the stocks in the table. What is the safest attainable portfolio under this restriction?
Correlation coefficients A B C D E A 1.00 .28 .46 -.02 .36 B .28 1.00 .08 -.09 .21 C .46 .08 1.00 -.04 .33 D -.02 -.09 -.04 1.00 .18 E .36 .21 .33 .18 1.00 Standard Deviations (%) 20.3 14 34.5 42.5 44.5Explanation / Answer
a. Calculate the variance of the annual return on a portfolio with equal investments in each stock. There are 5 stocks. So the percentage of investment in each stock = 100/5 * 100 = 20% Variance = standard deviation^2 Portfolio standard deviation = proportionate standard deviation of individual stocks Portfolio standard deviation = (0.20*20.3) + (0.20*14) + ( 0.20*34.5) + (0.20*42.5) +(0.20*44.5) Portfolio standard deviation = 31.16% Variance = (31.16%)^2 = 970.9456%^2 b. Calculate the beta of each stock in the table relative to a portfolio with equal investments in each stock. beta = r *stdeviation of asset/st.deviation of market where = r = correlation of asset with the market in absence of any information , we will take the average correlation of the stock with other assets in the market Stock A : Average correlation = (0.28+.46-.02+.36)/4 Average correlation = 0.27 Beta = (0.27 *20.3)/31.16 Beta = 0.17 Stock B : (Beta = 0.12*14)/31.16 Beta = 0.05 Stock C : Beta =(0.2075*34.5)/31.16 Beta = 0.23 Stock D : Beta =(0.03*42.5)/31.16 Beta = 0.041 Stock E : Beta =(0.27*44.5)/31.16 Beta = 0.38 c. Suppose you can invest in only two of the stocks in the table. What is the safest attainable portfolio under this restriction? If we analyse it through the individual standard deviations, investment in stock A and B will be safest as they have the lowest standard deviations. If we analyse it through the individual stock betas, investment in stock B and D will be safest as they have the lowest betas.
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