Management Information Systems
Week 4 Assignment 4 MGM 6620 Managerial Finance Professor: Manuel V. Sicre Student Name: Zoraya Sandoval
01/28/2012
Chapter #11
11.1 Diversifiable and Nondiversifiable Risks.
In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?
Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unsystematic portion of the total risk can be eliminated at little cost. On the other hand, there are systematic risks that affect all investments. This portion of the total risk of an asset cannot be lavishly eliminated. In other words, systematic risk can be controlled, but only by a costly reduction in expected returns.
11.5 Expected Portfolio Returns.
If a portfolio has a positive investment in every asset, can the expected return on the portfolio be greater than that on every asset in the portfolio? Can it be less than that on every asset in the portfolio? If you answer yes to one or both of these questions, give an example to support your answer.
No. The portfolio expected return is a weighted average of the asset returns, so it must be less than the largest asset return and greater than the smallest asset return. Questions and Problems (QP) 11.1, 11.4, 11.8 & 11.13
11.1 Determining Portfolio Weight.
What are the portfolio weights for a portfolio that has 90 shares of Stock A that sell for $84 per share and 50 shares of Stock B that sell for $58 per share?
Portfolio Value | 90($84) + 50($58) | $10,460 | Portfolio Weight | WeightA = 90($84)/$10,460 | WeightA = .7228 | WeightB = 50($58)/$10,460 | WeightB = .2772 |
11.4 Portfolio Expected Returns.
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 16 percent and Stock Y with an expected return
01/28/2012
Chapter #11
11.1 Diversifiable and Nondiversifiable Risks.
In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?
Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unsystematic portion of the total risk can be eliminated at little cost. On the other hand, there are systematic risks that affect all investments. This portion of the total risk of an asset cannot be lavishly eliminated. In other words, systematic risk can be controlled, but only by a costly reduction in expected returns.
11.5 Expected Portfolio Returns.
If a portfolio has a positive investment in every asset, can the expected return on the portfolio be greater than that on every asset in the portfolio? Can it be less than that on every asset in the portfolio? If you answer yes to one or both of these questions, give an example to support your answer.
No. The portfolio expected return is a weighted average of the asset returns, so it must be less than the largest asset return and greater than the smallest asset return. Questions and Problems (QP) 11.1, 11.4, 11.8 & 11.13
11.1 Determining Portfolio Weight.
What are the portfolio weights for a portfolio that has 90 shares of Stock A that sell for $84 per share and 50 shares of Stock B that sell for $58 per share?
Portfolio Value | 90($84) + 50($58) | $10,460 | Portfolio Weight | WeightA = 90($84)/$10,460 | WeightA = .7228 | WeightB = 50($58)/$10,460 | WeightB = .2772 |
11.4 Portfolio Expected Returns.
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 16 percent and Stock Y with an expected return