Consider the Following Data for Stocks a and B $\bar { R } _ { \mathrm { A } } = 10 \%$

question 23

Essay

Consider the following data for stocks A and B: $\bar { R } _ { \mathrm { A } } = 10 \%$ ; $\bar { R } _ { B } = 19 \%$ ; $\sigma _ { \mathrm { A } } = 3 \%$ ; $\sigma _ { B } = 5 \%$ ; $\beta _ { \mathrm { A } } = 0.6$ ; $\beta _ { B } = 1.4$ ; $\rho _ { A B } = 0.4$
a. Calculate the expected return, variance, and beta of a portfolio constructed by investing 1/3 of your funds in stock A and 2/3 in stock B.
b. If the riskless rate of return were 5%, what percentage of money invested in risky stocks should an investor place in each stock (assuming A and B are the only risky assets available)?
c. If the security market line describes equilibrium, and stocks A and B are in equilibrium, what is the return on the market portfolio and the riskless rate of interest?
d. If an investor can lend and borrow at the riskless rate determined in part c, but is restricted to holding only one of the two risky stocks in this problem, which stock should be held?

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Definitions:

Foreign Currency

Currency used in a country other than one's own, implying the need for exchange rate conversion in international transactions or financial reports.

Exchange Rates

The rate at which one currency can be exchanged for another, affecting how international transactions are recorded in financial statements.

Accounts Payable

The amounts a company owes because it purchased goods or services on credit from a supplier or vendor.

Accounts Payable

amounts owed by a business to its suppliers or creditors for goods and services received but not yet paid for.