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Question

Ebenezer Scrooge has invested 60% of his money in stock A and 40% in stock B. He assesses their prospects as follows: Stock A: - Expected return: 15% - Standard deviation: 20% - Beta: 1.5 Stock B: - Expected return: 20% - Standard deviation: 22% - Beta: 1.1 The correlation between the returns of stock A and stock B is 0.5. Now, let's answer the following questions: a) What is the expected return of his portfolio? b) What is the standard deviation of his portfolio? c) Is Mr. Scrooge better or worse off investing in the portfolio than investing entirely in stock A, or is it not possible to say? d) What is the portfolio beta? e) If the risk-free rate is 3% and the expected return of the market portfolio is 8%, what is the expected return of Mr. Ebenezer Scrooge's portfolio according to CAPM? f) If a new investor wants to invest in one and ONLY one stock, which one of stock A or stock B is a riskier investment for her and why? g) If an investor has a well-diversified portfolio of 50 stocks and she is considering adding EITHER stock A or stock B to that portfolio, which one is a riskier addition and why?

          Ebenezer Scrooge has invested 60% of his money in stock A and 40% in stock B. He assesses their prospects as follows:

Stock A:
- Expected return: 15%
- Standard deviation: 20%
- Beta: 1.5

Stock B:
- Expected return: 20%
- Standard deviation: 22%
- Beta: 1.1

The correlation between the returns of stock A and stock B is 0.5.

Now, let's answer the following questions:

a) What is the expected return of his portfolio?
b) What is the standard deviation of his portfolio?
c) Is Mr. Scrooge better or worse off investing in the portfolio than investing entirely in stock A, or is it not possible to say?
d) What is the portfolio beta?
e) If the risk-free rate is 3% and the expected return of the market portfolio is 8%, what is the expected return of Mr. Ebenezer Scrooge's portfolio according to CAPM?
f) If a new investor wants to invest in one and ONLY one stock, which one of stock A or stock B is a riskier investment for her and why?
g) If an investor has a well-diversified portfolio of 50 stocks and she is considering adding EITHER stock A or stock B to that portfolio, which one is a riskier addition and why?

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