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Solutions to Lab Problems for Chapter 08

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Unformatted text preview: Solutions to Lab Problems for Chapter 8 19. Section: 8.3 Expected Return and Risk for Portfolios Learning Objective: 8.4 Difficulty: Easy a. The correlation between the stocks is .75 w2 = 1 ­ w1= 1 ­ .35 = .65 σ2p = w21σ12+ w22σ22 +2w1w2ρ σ1 σ2 = (.35)2(.06)2 + (.65)2(.2)2 + 2*.35*.65*.75*.06*.2 = .000441 + .0169 +.004095 = ..021436 σp = 0.1464 The portfolio standard deviation is 14.64% when the correlation is 0.75. b. The correlation between the stocks if –.75 σ2p = w21σ12+ w22σ22 +2w1w2ρ σ1 σ2 = (.35)2(.06)2 + (.65)2(.2)2 + 2*.35*.65*( ­0.75)*.06*.2 = .000441 + .0169 +  ­0.004095 = 0.013246 σp = 11.509 The portfolio standard deviation is 11.51% when the correlation is –0.75. 27. Section: 8.1 Measuring Returns Learning Objective: 8.2 Difficulty: Medium To determine what the recommendation should be, we need to determine the expected price in the future: .35*220+.40*100+.25*140. = $152. The recommendation should be changed to “buy”– at the current price of $140, the stock is underpriced. 45. Section: 8.1 Measuring Returns Learning Objective: 8.1 Difficulty: Medium Capital gain = ($87 ­$82)×250 = $1,250 Total dollar return = $1,250 + $750 = $2,000 Percentage return = $2,000/($82×250) = 9.76% 1 ...
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