The Canadian Musician/Artist Aubrey Drake Graham, known by his stage name “Drake“ has invested 70% of his money in share A and the remainder in share B. He assesses their prospects as follows:
Expected return (%)
Standard deviation (%)
Correlation between returns
What are the expected return and standard deviation of returns on this two share portfolio? (Do not round intermediate calculations. Set your answers to four decimal places please.)
Note: For a two stock portfolio:
E(Rp)= rp = x1r1 + x2r2
sp2 = x12s12 + x22s22 +2x1x2 r12 s1s2 =
Expected return =
=E (weight) *expected return Variance = Standard deviation =
How would your answer change if the correlation coefficient were 0 or –.3? Does this affect the portfolio level of risk, if so, how? (Round your answers to 2 decimal places.)? Correlation coefficient = Standard deviation = Correlation coefficient = Standard deviation =
Is Drake’s portfolio better or worse than one invested entirely in share A, or is it possible to determine? Head’s UP Please.
The Treasury bill rate is 3% (rf) and the expected return on the market portfolio is 13% (rm). Using the capital asset pricing model with the aforementioned assumptions regarding risk free rate and market rate to answer the following questions: Draw a graph similar to Figure 8.7 (found on p. 208, within chapter 8 of our textbook) showing how the expected return varies with beta.
rf will start at 3% and 0 beta, for market, rm of .13 and beta of 1.0
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