Question 20 Suppose you have a portfolio where you have invested $15515 in Stock

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Question 20

Suppose you have a portfolio where you have invested $15515 in Stock A and Stock B. Stock A has an expected return of 19.6% and Stock B has an expected return of 6.3%. If your goal is to create a portfolio with an expected return of 10.1%, what is your dollar investment in Stock B?

Note: Enter your answer rounded off to two decimal points. Do not enter $ in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

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Question 21

Given the data below, compute the standard deviation for stock A. Enter your answer in percentages rounded off to two decimal points.Do not enter % in the answer box.

Event Probability Returns Pessimistic 25% 13% Most Likely 50% 15% Optimistic 25% 17%

Explanation / Answer

Let investment in B=$x

Hence total investment=(15515+x)

Portfolio return=Respective return*Respective weights

10.1=(15515/(15515+x)*19.6)+(x/(15515+x)*6.3)

10.1*(15515+x)=304094+6.3x

156701.5+10.1x=304094+6.3x

x=(304094-156701.5)/(10.1-6.3)

=$38787.5=investment in B.

2.

Expected return=Respective return*Respective probability

=(0.25*13)+(0.5*15)+(0.25*17)=15%

Standard deviation=[Total probability*(Return-Expected return)^2/Total probability]^(1/2)

=(2)^(1/2)

which is equal to

=1.41%(Approx).

probability Return probability*(Return-Expected return)^2 0.25 13 0.25*(13-15)^2=1 0.5 15 0.5*(15-15)^2=0 0.25 17 0.25*(17-15)^2=1 Total=2%

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