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Category > Business & Finance Posted 15 Jul 2017 My Price 8.00

1. A broker has advised you not to invest in oil industry stocks because

1. A broker has advised you not to invest in oil industry stocks because, in her opinion, they are far too risky. She has shown you evidence of how wildly the prices of oil stocks have fluctuated in the recent past. She demonstrated that the standard deviation of oil stocks is very high relative to most stocks. Do you think the broker’s advice is sound for a riskaverse investor like you? Why or why not?

2. There are three securities in the market. The following chart shows their possible payoffs.

State

Probability
of Outcome

Return on
Security 1

Return on
Security 2

Return on
Security 3

1

0.10

0.25

0.25

0.10

2

0.40

0.20

0.15

0.15

3

0.40

0.15

0.20

0.20

4

0.10

0.10

0.10

0.25

a. What are the expected return and standard deviation of each security?

b. What are the covariances and correlations between the pairs of securities?

c. What are the expected return and standard deviation of a portfolio with half of its funds invested in security 1 and half in security 2?

d. What are the expected return and standard deviation of a portfolio with half of its funds invested in security 1 and half in security 3?

e. What are the expected return and standard deviation of a portfolio with half of its funds invested in security 2 and half in security 3?

f. What do your answers in parts (a), (c), (d), and (e) imply about diversification?

Answers

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Status NEW Posted 15 Jul 2017 09:07 AM My Price 8.00

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