Suppose Sarah starts her investment portfolio by allocating US$ 25,000 across three assets, stocks A, B and C, as follows:
Stock A: 40% of allocation
Stock B: 32% of allocation
Show your work.
Lecture 3: Q2:
a) The risk of a portfolio consisting of two uncorrelated assets will be:
Explain your answer
b) Assume that two assets have a coefficient of correlation of -.4. Asset A has a standard deviation of 20% and asset B has a standard deviation of 40%. Relative to holding a portfolio consisting of 100% of Asset B, what happens to risk if you combine these assets into a 50-50 weighted portfolio? Explain your answer
Lecture 3: Q3: Returns on the stock of FBM and MMInc for the years 2017-2020 are shown below.
Explain your answers and show your work.
Lecture 4: Q4:
a) The markets in general are paying a 1% real rate of return. Inflation is expected to be 3%. RJH stock commands an 8% risk premium. What is the expected rate of return on RJH stock? Explain your answer in terms of systematic and idiosyncratic risks, and the relationship between expected (required) market returns and inflation risk.
b) The required rate of return on the RJH common stock is 10%, holding all other assumptions as in (a), what is the risk premium associated with RJH stock? Explain your answer.
Lecture 4: Q5: Which one following will lower required rates of return and why?
Explain your answers.
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