are171a-homework-3-key

are171a-homework-3-key - ~_~m~ew;r~k 3_K_EY F_all_20i(I...

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~_~~m~ew_;r~k 3..: ..... -_K_EY __ F_all_20i] 1\ \<- E ViI A (1 )a. (I) {These stocks appear to be positively correlated ,I because both perform best when the economy is strong, and worst when the economy is weak. -- 11.5 11.1915 0.9732 10,55 1.9615 0.1859 6 -10 10 11 25 12 From the table below, we see that Milgard Yachts has a much higher CV (more risky), and also a higher ~pected §!ITil State of the world> Strong Economy Average Economy Weak Economy Exp. Return Std. Dev CV Probability (i) > 0.3 0,55 0.15 (ii) Milyard Yachts 0.3 Stock Weight in portfolio 0> Foodmart 0.7 0.4293 \ 4.6509 4.7305 10.7 15.9 1.2 l10.835 ---------------..?'=--------- r- (iii) See table above. We see that Garth's portfolio has standard deviation of 4.6509. a linear combination of std deviations (weighted $verage) would be '- ~ .7*(1.9615) + ,3*(11.1915) = 4.7305 WF ~F t w»\ \Jrn So there is some risk reduction, due to diversification, though the effect is not too large in this case. 1.b. Portfolio State of the world> Strong Economy Average Economy Weak Economy Exp. Return Std. Dev CV Probability (i) > 0.3 0.55 0.15 Stock Weight in portfolio 0> Foodmart 0.3 12 11 6 10.55 1.9615 0.1859 Milyard Yachts 0.3 25 10 -10 11.5 11.1915 0.9732 Treasury bills 0.4 3 3 3 3 0,0000 0.0000
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