Business, 30.03.2020 19:08, janetcooly

Your uncle holds just one stock, East Coast Bank (ECB). You agree that this stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 70% in ECB and the remainder in WCB?

Answers: 1

Show answers

Answers

answered: nook4boo

Complete question:

Assume that your uncle holds just one stock, East Coast Bank (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for West Coast Bank (WCB). Both banks have had less variability than most other stocks over the past 5 years.

Year ECB WCB

2004 40.00% 40.00%

2005 -10.00% 15.00%

2006 35.00% -5.00%

2007 -5.00% -10.00%

2008 15.00% 35.00%

a. What is the expected return and risk of each stock?

b. Measured by the standard deviation of returns, by how much would your uncle's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? In other words, what is the difference between portfolio's standard deviation and weighted average of components' standard deviations? (Hint: check the example on page 11-12 on my note).

Solution:

The estimated return of the stock is the average profit.

So the average of ECB is (40-10+35-5+15)/5

= $\frac{75 percent}{5}$

= 15% expected return

WCB expected return = 40+15-5-10+35

= $\frac{75 percent}{5}$

= 15%

They've had the same planned return.

This is generally defined in the Greek letter Mu, (U) A weighted average may also be used to calculate portfolio volatility.

Standard deviation of ECB is $\sqrt{{ sum [(x-U)^2]/5}}$

so for ECB:

(40-15)^2 = 25^2 =6.25%

(-10-15)^2 = -35^2 = 0.1225

(35-15)^2 = 20^2 = 0.04

(-5-15)^2 = -20^2 = 0.04

(15-15)^2 =0

now 0.0625+0.1225+0.04+0.04+0=0.265

stdev= $\sqrt{(0.265/5)}$ = 0.23

So WCB is the same except in a different order to make things quick I'm only going to add the median again WCB=0.23

Then the 60/40 portfolio will be the "weighted average" of the returns.

portfolio returns

2004: (60%*40%)+(40%*40%) = 40%

2005: (60%*-10%)+(40%*15%) = 0%

2006: (60%*35%)+(40%*-5%) = 19%

2007: (60%*-5%)+(40%*-10%) = -7%

2008:(60%*15%)+(40%*35%) = 23%

we have an average return of (40+19-7+23)/5 = 75/5 =15%

The estimated return of all combined stocks is a better way to do so.

we knew they both had expected returns of 15% so we can say

(60%*15%)+(40%*15%)=15% so the portfolio has an expected return of 15%

Now we do the standard deviation for the whole portfolio and get

(40-15)^2 = 25^2 =6.25%

(0-15)^2 = - 25^2 =6.25%

(19-15)^2 = 4^2 = 0.16%

(-7-15)^2 = -22^2 = -4.84%

(23-15)^2 = 8^2 = 0.64%

now add them up and get 9.78%

$\sqrt{(9.78%/5)}$ = 13.98%

Therefore, the normal portfolio variance is 13.98 per cent and the predicted portfolio return is 15 per cent.

Every stock has a standard deviation of 23 per cent and an average return of 15 per cent, meaning that the fund has the same estimated return but with less standard deviation. This ensures that the same gain is less costly. It's stronger than any of these products.

answered: Guest

in terms of experimental research, mcdonald’s charging different prices in the two cities relates to

answered: Guest

Answerrecover no damages from the driver;

Other questions on the subject: Business

Business, 22.06.2019 19:20, natajayd

The following information is from the 2019 records of albert book shop: accounts receivable, december 31, 2019 $ 42 comma 000 (debit) allowance for bad debts, december 31, 2019 prior to adjustment 2 comma 000 (debit) net credit sales for 2019 179 comma 000 accounts written off as uncollectible during 2017 15 comma 000 cash sales during 2019 28 comma 500 bad debts expense is estimated by the method. management estimates that $ 5 comma 300 of accounts receivable will be uncollectible. calculate the amount of bad debts expense for 2019.

Answers: 2

continue

Business, 23.06.2019 00:30, humpty21

One of the growers is excited by this advancement because now he can sell more crops, which he believes will increase revenue in this market. as an economics student, you can use elasticities to determine whether this change in price will lead to an increase or decrease in total revenue in this market. using the midpoint method, the price elasticity of demand for soybeans between the prices of $5 and $4 per bushel is , which means demand is between these two points. therefore, you would tell the grower that his claim is because total revenue will as a result of the technological advancement.

Answers: 1

continue

Business, 23.06.2019 02:50, trejoste1

Three years ago, stock tek purchased some five-year macrs property for $82,600. today, it is selling this property for $31,500. how much tax will the company owe on this sale if the tax rate is 34 percent? the macrs allowance percentages are as follows, commencing with year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

Answers: 1

continue

Business, 23.06.2019 13:30, nell1234565

Wyome has a career in manufacturing and goes to an office to work every day. at the office, he most likely works with

Answers: 2

continue

Do you know the correct answer?

Your uncle holds just one stock, East Coast Bank (ECB). You agree that this stock is relatively safe...