You Plan to Invest in Stock X, Stock Y, or Some

question 33

Essay

You plan to invest in Stock X, Stock Y, or some combination of the two. The expected return for X is 10% and σX = 5%. The expected return for Y is 12% and σY = 6%. The correlation coefficient, rXY, is 0.75.
a. Calculate rp and σp for 100%, 75%, 50%, 25%, and 0% in Stock X.
b. Use the values you calculated for rp and σp to graph the attainable set of portfolios. Which part of the attainable set is efficientσ Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y. Let an indifference curve be tangent to the efficient set at the point where rp = 11%.
c. Now suppose we add a riskless asset to the investment possibilities. What effects will this have on the construction of portfoliosσ
d. Suppose rM = 12%, σM = 4%, and rRF = 6%. What would be the required and expected return on a portfolio with σP = 10%σ
e. Suppose the correlation of Stock X with the market, rXM, is 0.8, while rYM = 0.9. Use this information, along with data given previously, to determine Stock X's and Stock Y's beta coefficients.
f. What is the required rate of return on Stocks X and Yσ Do these stocks appear to be in equilibriumσ If not, what would happen to bring about an equilibriumσ

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Definitions:

Systematic Desensitization

A therapy method that gradually exposes a person to an anxiety-producing object or situation while teaching relaxation techniques.

Progressive Relaxation

A technique in which one tenses and then gradually relaxes each muscle group in the body to reduce stress.

Psychological Therapy

An umbrella term for therapies that treat mental health issues through psychological means rather than medical methods.

Sigmund Freud

Sigmund Freud, an Austrian neurologist, originated psychoanalysis, a clinical approach to treat mental disorders through conversations between a patient and a psychoanalyst.