I've included the assignments questions as an attachment
Ch. 6 EOC Assignment For any problems that require use of data in Excel, simply write down the ultimate answer on the paper that you turn in (you don’t need to show your work on the paper that was performed in Excel). Spreadsheets 6.1 and 6.2 6. Suppose that the returns on the stock fund presented in Spreadsheet 6.1 were −40%, −14%, 17%, and 33% in the four scenarios. (LO 6-2) a. Would you expect the mean return and variance of the stock fund to be more than, less than, or equal to the values computed in Spreadsheet 6.2? Why? b. Calculate the new values of mean return and variance for the stock fund using a format similar to Spreadsheet 6.2. Confirm your intuition from part (a). c. Calculate the new value of the covariance between the stock and bond funds using a format similar to Spreadsheet 6.4. Explain intuitively the change in the covariance. The following data apply to Problems 8–12. A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long- term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are: The correlation between the fund returns is .15. 8. Tabulate and draw the investment opportunity set of the two risky funds. Use investment proportions for the stock fund of 0% to 100% in increments of 20%. What expected return and standard deviation does your graph show for the minimum- variance portfolio? (LO 6-2) 9. Draw a tangent from the risk-free rate to the opportunity set. What does your graph show for the expected return and standard deviation of the optimal risky portfolio? (LO 6-3) 10. What is the Sharpe ratio of the best feasible CAL? (LO 6-3) 11. Suppose now that your portfolio must yield an expected return of 12% and be efficient, that is, on the best feasible CAL. (LO 6-4) a. What is the standard deviation of your portfolio? b. What is the proportion invested in the T-bill fund and each of the two risky funds? 12. If you were to use only the two risky funds and still require an expected return of 12%, what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimal portfolio in the previous problem. What do you conclude? (LO 6-4) 21. The following figure shows plots of monthly rates of return and the stock market for two stocks. (LO 6-5) a. Which stock is riskier to an investor currently holding a diversified portfolio of common stock? b. Which stock is riskier to an undiversified investor who puts all of his funds in only one of these stocks? 2. George Stephenson's current portfolio of $2 million is invested as follows: Stephenson soon expects to receive an additional $2 million and plans to invest the entire amount in an index fund that best complements the current portfolio. Stephanie Coppa, CFA, is evaluating the four index funds shown in the following table for their ability to produce a portfolio that will meet two criteria relative to the current portfolio: (1) maintain or enhance expected return and (2) maintain or reduce volatility. Each fund is invested in an asset class that is not substantially represented in the current portfolio. Page 186 State which fund Coppa should recommend to Stephenson. Justify your choice by describing how your chosen fund best meets both of Stephenson's criteria. No calculations are required. (LO 6-4) 3. Abigail Grace has a $900,000 fully diversified portfolio. She subsequently inherits ABC Company common stock worth $100,000. Her financial adviser provided her with the following estimates: (LO 6-5) The correlation coefficient of ABC stock returns with the original portfolio returns is .40. a. The inheritance changes Grace's overall portfolio and she is deciding whether to keep the ABC stock. Assuming Grace keeps the ABC stock, calculate the: i. Expected return of her new portfolio which includes the ABC stock. ii. Covariance of ABC stock returns with the original portfolio returns. iii. Standard deviation of her new portfolio which includes the ABC stock. b. If Grace sells the ABC stock, she will invest the proceeds in risk-free government securities yielding .42% monthly. Assuming Grace sells the ABC stock and replaces it with the government securities, calculate the: i. Expected return of her new portfolio which includes the government securities. ii. Covariance of the government security returns with the original portfolio returns. iii. Standard deviation of her new portfolio which includes the government securities. c. Determine whether the beta of her new portfolio, which includes the government securities, will be higher or lower than the beta of her original portfolio. d. Based on conversations with her husband, Grace is considering selling the $100,000 of ABC stock and acquiring $100,000 of XYZ Company common stock instead. XYZ stock has the same expected return and standard deviation as ABC stock. Her husband comments, “It doesn't matter whether you keep all of the ABC stock or replace it with $100,000 of XYZ stock.” State whether her husband's comment is correct or incorrect. Justify your response. e. In a recent discussion with her financial adviser, Grace commented, “If I just don't lose money in my portfolio, I will be satisfied.” She went on to say, “I am more afraid of losing money than I am concerned about achieving high returns.” Describe one weakness of using standard deviation of returns as a risk measure for Grace. 7. Dudley Trudy, CFA, recently met with one of his clients. Trudy typically invests in a master list of 30 equities drawn from several industries. As the meeting concluded, the client made the following statement: “I trust your stock-picking ability and believe that you should invest my funds in your five best ideas. Why invest in 30 companies when you obviously have stronger opinions on a few of them?” Trudy plans to respond to his client within the context of Modern Portfolio Theory. (LO 6-1) a. Contrast the concepts of systematic risk and firm-specific risk, and give an example of each type of risk. b. Critique the client's suggestion. Discuss how both systematic and firm-specific risk change as the number of securities in a portfolio is increased.