# F suppose you create a two stock portfolio by

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f. Suppose you create a two-stock portfolio by investing \$50,000 in Alta Industries and \$50,000 in Repo Men. Calculate the expected return, standard deviation, coefficient of variation, and beta for this portfolio. How does the risk of this two-stock portfolio compare with the risk of the individual stocks if they were held in isolation? Barney Smith Investment Advisors recently issued estimates for the state of the economy and the rate of return on each state of the economy. Alta Industries, Inc. is an electronics firm; Repo Men Inc. collects past due debts; and American Foam manufactures mattresses and various other foam products. Barney Smith also maintains an "index fund" which owns a market-weighted fraction of all publicly traded stocks; you can invest in that fund and thus obtain average stock market results. Given the situation as described, answer the following questions. ANSWER A T-Bills Alta Inds. Repo Men 8% 17% 2% 14% 15% Expected rate of return B 0 20% 13% 19% 15% Standard deviation C 0 1.18 6.50 1.36 1.00 Coefficient of variation = Standard d American Foam Market Port.
ate of return 2*8%)+(.4*8%)+(.2*8%)+(.1*8%)= 8% +(.2*-2%)+(.4*20%)+(.2*35%)+(.1*50%)= 17% (.2*14.7%)+(.4*0%)+(.2*-10%)+(.1*-20%)= 2% (.2*-10%)+(.4*7%)+(.2*45%)+(.1*30%)= 14% +(.2*1%)+(.4*15%)+(.2*29%)+(.1*43%)= 15%
Variance T-Bills Alta Inds. (.1*[-22%-17%]²)+(.2*[-2%-17%]²)+(.4*[20%-17%]²)+(.2*[35%-17%]²)+(.1*[50%-17%]²)= Repo (.1*[28%-2%²])+(.2*[14.7%-2%²])+(.4*[0%-2%²])+(.2*[-10%-2%²])+(.1*[-20%-2%²])= American (.1*[10%-14%²])+(.2*[-10%-14%²])+(.4*[7%-14%²])+(.2*[45%-14%²])+(.1*[30%-14%²])= Market (.1*[-13%-15%²])+(.2*[1%-15%²])+(.4*[15%-15%²])+(.2*[29%-15%²])+(.1*[43%-15%²])= deviation / Expected rate or return (.1*[8%-8%]²)+(.2*[8%-8%]²)+(.4*[8%-8%]²)+(.2*[8%-8%]²)+(.1*[8%-8%]²)=
Variance Standard deviation 0 0 = 0.04016 20% 0.017866 13% = 0.03542 19% = 0.02352 15%