nhw1a - Homework 1 1. A firm that first insists that it...

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Homework 1 1. A firm that first insists that it invests a specific percentage of its portfolio in bonds, stock, and in treasury bills, rather than first trying to identify specific good stocks or bonds, is most likely practicing what type of portfolio construction? Top down portfolio construction, this firm is choosing how much to allocate to different area of investment before selected particular investments in each class. The stock section of this portfolio is made up of mostly Blamo stock. Blamo can behave in three different ways over the next year depending on the state of the world: State Return Probability Good 15% 30% Okay 6% 45% Bad -4% 25% What is the expected return of the stock? E(r)=.15*(.30)+.06*(.45)+(-.04)*(.25)= .062 What is the variance of the stock? Variance= .30*(.15-.062)^2+.45*(.06-.062)^2+.25*(-.04-.062)^2=.004926 What is the Sharpe ratio of the stock if the risk-free rate is 5, 4, or 2%? =(.062-.05)/( .004926)^1/2 = .170975,
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This note was uploaded on 10/15/2011 for the course ECON 171 taught by Professor Hull during the Spring '09 term at Brandeis.

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nhw1a - Homework 1 1. A firm that first insists that it...

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