Solution_Practice Problems for Midterm

Var ri i2var rm var i 2 2 var r p

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Unformatted text preview: ed return on the portfolio is E ( Rp ) = 1.16 ! .12 + (1 " 1.16 ) ! .09 = 0.138 = 13.8% and its standard deviation is !p = 2 2 2 (1.6) ! (.3) + (1 " 1.6) ! (.2) 2 + 2 ! 1.6 ! (1 " 1.6 ) ! .8 ! .3 ! .2 =0.39=39% 6. The variance of the portfolio is equal to the variance of the stock. Since all stock returns follow a one ­factor model, the variance of the return of a stock is given by Var ( Rp ) ! Var ( Ri ) = ! i2Var ( Rm ) + Var (!i ) 2 2 " Var ( R p ) = 1 # ( 0.2 ) + ( 0.3) = 0.13 Therefore, the standard deviation of return on the portfolio is equal to 0.13 = 36.06% . 10 1 7. An equally ­weighted portfolio of 10 s...
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This document was uploaded on 03/12/2014.

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