1. Your portfolio allocates equal funds to the DW Co. and Woodpecker, Inc. DW Co
ID: 2796577 • Letter: 1
Question
1. Your portfolio allocates equal funds to the DW Co. and Woodpecker, Inc. DW Co. stock has an annual return mean and standard deviation of 12 percent and 30 percent, respectively. Woodpecker, Inc., stock has an annual return mean and standard deviation of 18 percent and 44 percent, respectively. The return correlation between DW Co. and Woodpecker, Inc., is zero. What is the smallest expected loss for your portfolio in the coming month with a probability of 2.5 percent? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
2. Consider the following information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is .97.
What are the Sharpe and Treynor ratios for the fund? (Do not round intermediate calculations. Round your answers to 4 decimal places.)
1. Your portfolio allocates equal funds to the DW Co. and Woodpecker, Inc. DW Co. stock has an annual return mean and standard deviation of 12 percent and 30 percent, respectively. Woodpecker, Inc., stock has an annual return mean and standard deviation of 18 percent and 44 percent, respectively. The return correlation between DW Co. and Woodpecker, Inc., is zero. What is the smallest expected loss for your portfolio in the coming month with a probability of 2.5 percent? (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
(i) Calculate SD of portfolio - As the coorelation is 0 As the portfolio is equally weighted Wa=Wb=0.5 Variance of portfolio = Wa^2 x Sda^2 + Wb^2 x SDb^2 = 0.5^2 x 30^2 + 0.5^2 x 44^2 = 625 SD of portfolio = sq. root 625 = 25 Minimum expected loss = sdp x prob.= = 25 x 2.5% 0.625 (ii) Year Return(x) X- Mean (x-mean)^2 Rf 2008 -15.2 -20.66 426.8356 1 2009 25.1 19.64 385.7296 3 2010 12.4 6.94 48.1636 2 2011 6.2 0.74 0.5476 4 2012 -1.2 -6.66 44.3556 2 27.3 905.632 12 Mean return = 27.3/5 = 5.46 SD of returns = sq. root of (905.632/5) = = 13.45832 Average Rf = 12/5= 2.4 Sharpe ratio = (Mean return - Rf rate)/SD of return 0.227369 Please provide feedback……... thanks in advance……… :-)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.