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Tresset [83]
3 years ago
15

Analyzing portfolio risk and return involve the understanding of expected returns from a portfolio. Consider the following case:

Andre is an amateur investor who holds a small portfolio consisting of only four stocks.The stock holdings in his portfolio are shown in the following table: Artemis (20% of portfolio, 6.00% expected return, 34.00% standard deviation) Babish & Co. (30% of portfolio, 14.00% expected return, 38.00% standard deviation) Cornell Industries (35% of portfolio, 12.00% expected return, 41.00 standard deviation) Danforth Motors (15% of portfolio, 3.00% expected return, 43.00% standard deviation) What is the expected return of Andre's stock portfolio? a. 15.08, b. 13.57, c. 10.05 d. 7.54 Suppose each stock in the preceding portfolio has a correlation coefficient of 0.4 (p=0.4) with each of the other stocks. If the weighted average of the risk (standard deviation) of the individual securities in the partially diversified portfolio of four stocks is 39%, the portfolio's standard deviation most likely is ________ 39%.
a. equal to.
b. more than.
c. less than.
Business
1 answer:
dimulka [17.4K]3 years ago
4 0

Answer:

In order to find expected portfolio return we multiply the weight of each security by its expected return and then add all the values.

Artemis = 0.2*0.06=0.012= 1.2%

Babish= 0.3*0.14=0.042= 4.2%

Cornell = 0.35*0.12= 0.042= 4.2%

Danforth Motors = 0.15*0.03=0.0045= 0.45%

1.2+4.2 + 4.2 +0.45=10.05%

Then in order to find the portfolio variance  the formula is

Variance = (w(1)^2 * SD(1)^2) + (w(2)^2 * SD(2)^2) + (2 * (w(1)*(1)*w(2)*o(2)*q(1,2)))

and we can under root this to find the standard deviation

Variance = (w(1)^2 * SD(1)^2) + (w(2)^2 * SD(2)^2) + (2 * (w(1)*SD(1)*w(2)*SD(2)*CR(1,2)))

W (1): Weight of one stock in the portfolio squared.

SD (1): The standard deviation of one asset in the portfolio squared.

W (2): Weight of second stock in the portfolio squared.

O (2): The standard deviation of the second asset in the portfolio squared.

CR(1,2): The correlation between the two assets in the portfolio has been denoted as q (1,2).

When we use this formula whenever the co relation is less than 1 the portfolio standard deviation is less than the weighted average standard deviation of all the individual stocks.

So in this case as the co relation is less than 1 portfolios standard deviation is less than 39%

Explanation:

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repare a contribution format income statement segmented by divisions. 2-a. The Marketing Department has proposed increasing the
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Question Completion:

Wingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement: Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) $ 1,509,000 567,040 941,968 1,036,000 $ (94,040) In an effort to resolve the problem, the company would like to prepare an income statement segmented by division. Accordingly, the Accounting Department has developed the following information: Division Central $389,000 $600,000 $520,000 East West Sales Variable expenses as a percentage of sales Traceable fixed expenses 27% 36% $283,000 $336,000 $203,000

Prepare a contribution format income statement segmented by divisions Division Total Company East Central West

The Marketing Department has proposed increasing the West Division's monthly advertising by $25,000 based on the belief that it would increase that division's sales by 19%.

Answer:

Wingate Company

a. Contribution format income statement segmented by divisions

Division                            Total Company        East      Central        West

Sales                                   $ 1,509,000   $389,000  $600,000  $520,000

Variable expenses                   567,040      217,840      162,000      187,200

Contribution margin                 941,960     $171,160   $438,000   $332,800

Traceable fixed expenses      822,000  $283,000   $336,000  $203,000

Non-traceable fixed expense  214,000

Net operating income (loss) $ (94,040)   ($111,840)   $102,000  $129,800

b. If the marketing department's proposal is implemented, the net operating loss will decrease by $38,232, i.e from $94,040 to $55,808.

Explanation:

a) Data and Calculations:

Wingate's most recent monthly contribution format income statement:

Sales                                   $ 1,509,000

Variable expenses                   567,040

Contribution margin                 941,968

Fixed expenses                     1,036,000

Net operating income (loss) $ (94,040)

Additional information:

Division                                 Central       East          West

Sales                                   $389,000  $600,000  $520,000

Variable expenses as a

 percentage of sales                 56%           27%           36%

Traceable fixed expenses $283,000  $336,000 $203,000

Increase in Division West's fixed expenses by $25,000

Expected increase in Division West's sales = 19%

Contribution format income statement segmented by divisions

Division                            Total Company        East      Central        West

Sales                                   $ 1,509,000   $389,000  $600,000  $520,000

Variable expenses                   567,040      217,840      162,000      187,200

Contribution margin                 941,968     $171,160   $438,000   $332,800

Traceable fixed expenses      822,000  $283,000   $336,000  $203,000

Non-traceable fixed expense  214,000

Net operating income (loss) $ (94,040)   ($111,840)   $102,000  $129,800

Based on new proposal:

Contribution format income statement segmented by divisions

Division                            Total Company        East      Central        West

Sales                                   $ 1,607,800   $389,000  $600,000   $618,800

Variable expenses                  602,608      217,840      162,000    222,768

Contribution margin              1,005,192     $171,160   $438,000  $396,032

Traceable fixed expenses      847,000  $283,000   $336,000  $228,000

Non-traceable fixed expense  214,000

Net operating income (loss) $ (55,808)   ($111,840)   $102,000  $168,032

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