7. Here are summary statistics on monthly returns for five U.S. common stocks, b

Question

7. Here are summary statistics on monthly returns for five U.S. common stocks, based on 60 observations from January 1990 through December 2014 Microsoft 0.0136 0.0199 10410.0935 IBM 0.0110 0.0793 ean td. dev Correlations 0.4536 0.4489 1.0000 .0000 0.4037 oft 4037 0.4536 0.4489 1.0000 IBM Assume that thes that you may not make negative investments (such as short sales) in any of the stocks. e summary figures will still apply to future investments. Also assume What portfolio (expressed as fractions of a dollar invested in each of the three stocks) would yield the highest expected monthly return a. NOTE: A portfolio is to invest p1 (fraction of $1) in the stock of HP, p2 in Microsoft, and p3 in IBM (where pl + p2+ p3 = 1). Therefore, the monthly return(MR) is: MR-pDX + p2.Y + p3.z- where X, Y and Z are the monthly returns of HP, Microsoft and IBM stocks, respectively. So you need to find out what values of (p1, p2, p3) would maximize ECMR). b. What stock is the riskiest? NOTE: risk- variance of the monthly returns (MR).+

Explanation / Answer

Clearly, if you look at mean returns of the three companies, Microsoft is highest, followed by HP and IBM. Now, since the task is to maximize the returns, simply invest all the money in Microsoft. So p2=1, p1=0, p3=0.

On the other hand, riskiness of an asset is given by variance.

Variance is basically square of standard deviation. So, higher is the standard deviation, higher is the variance, risky is the asset. Out of the three, HP has the highest standard deviation, hence the highest variance and is the riskiest of the lot

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.