Investment 9ed Chaps 6-7 answer

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1、CHAPTER06EFFICIENTDIVERSIFICATION1.Solongasthecorrelationcoefficientisbelow1.0,theportfoliowillbenefitfromdiversificationbecausereturnsoncomponentsecuritieswillnotmoveinperfectlockstep.Theportfoliostandarddeviationwillbelessthanaweightedaverageofthestandarddeviationsofthecomponentsecur

2、ities.2.Thecovariancewiththeotherassetsismoreimportant.Diversificationisaccomplishedviacorrelationwithotherassets.Covariancehelpsdeterminethatnumber.3.aandbwillhavethesameimpactofincreasingtheSharperatiofrom.40to.45.4.Theexpectedreturnoftheportfoliowillbeimpactediftheassetallocationisc

3、hanged.SincetheexpectedreturnoftheportfolioisthefirstiteminthenumeratoroftheSharperatio,theratiowillbechanged.25.Totalvariance=Systematicvariance+Residualvariance=βVar(rM)+Var(e)222Whenβ=1.5andσ(e)=.3,variance=1.5×.2+.3=.18.Intheotherscenarios:TOTALsMs(e)bVarianceCorrCoeff0.20.31.650.1

4、9890.73990.20.331.50.19890.6727a.Bothwillhavethesameimpact.Totalvariancewillincreasefrom.18to.1989.b.Eventhoughtheincreaseinthetotalvariabilityofthestockisthesameineitherscenario,theincreaseinresidualriskwillhavelessimpactonportfoliovolatility.Thisisbecauseresidualriskisdiversifiable.I

5、ncontrast,theincreaseinbetaincreasessystematicrisk,whichisperfectlycorrelatedwiththemarket-indexportfolioandthereforehasagreaterimpactonportfoliorisk.6.a.Withoutdoinganymath,thesevererecessionisworseandtheboomisbetter.Thus,thereappearstobeahighervariance,yetthemeanisprobablythesamesinc

6、ethespreadisequallylargeonboththehighandlowside.Themeanreturn,however,shouldbehighersincethereishigherprobabilitygiventothehigherreturns.1b.Calculationofmeanreturnandvarianceforthestockfund:(A)(B)(C)(D)(E)(F)(G)DeviationCol.BfromCol.BRateof×ExpectedSquaredScenarioProbabilityReturnCol.C

7、ReturnDeviationCol.FSevererecession0.05-40-2.0-51.22621.44131.07Mildrecession0.25-14-3.5-25.2635.04158.76Normalgrowth0.40176.85.833.6413.46Boom0.30339.921.8475.24142.57ExpectedReturn=11.2Variance=445.86StandardDeviation=21.12c.Calculationofcovariance:(A)(B)(C)(D)(E)(F)DeviationfromMe