Economics -AW-Q431

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You are facing the following market data on the US Stock Market.
Assumed Market Return 14.50%
Assumed risk free rate 1.50%
Assumed Market volatility 15%
 
You are considering investing all your wealth in a risky portfolio, so you ask for an advice from 2
different professional investment planners. The first one is proposing you the following allocation of 6
stocks (Portfolio Alpha).
 
Stock Weight
(wn)
Annual volatility
(σn)
 
Expected returns Covariance with the
 
Market
A 10% 10% 39% 0.01
B 20% 5% 29% 0.005
C 40% 60% 30% 0.06
D 5% 30% 25% 0.03
E 15% 25% 12% 0.025
F 10% 40% 7% 0.04
Total 100%
Expected returns = ?
Variance = 0.017875
Volatility = 13.37%
1) Can you rank the stocks in terms of risk? Can you say anything on the relation between the stocks and the market?
 
2) Calculate the expected return for the proposed allocation. Can you relate the proposed investment with the market?
3) Would you be willing to invest in this allocation? Carefully motivate your answer.
 
The second one is proposing you the following allocation of 2 stocks (Portfolio Beta).
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Stock Weight (wn) Annual volatility
(σn)
Expected
returns
Covariance with
the market
Correlation
A,B
A 12% 10% 39% 0.01 0.5
B 88% 5% 29% 0.005
 

1) Calculate the expected return and the volatility for the proposed allocation.
2) Would you be willing to invest in this allocation? Carefully motivate your answer.
3) Can you rank the 3 options you have as investment (Market, Portfolio Alpha, Portfolio Beta)?
Carefully motivate your answer.
 

Product Code-Economics -AW-Q431
 

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