Mo Howard, CFA, intends to create a two-stock portfolio comprising Larry Corporation and Curly International. The possible returns of the two stocks are the following: Larry Curly Return (“R”) Probability (“P®”) Return (“R”) Probability (“P®”) -5% 0.3 - 35% 0.3 5% 0.4 35% 0.4 10% 0.3 40% 0.3 The risk-free rate (“rf”) is 3%, and the standard deviation of the market index (“óM”) is 25%. In addition, Larry’s returns are approximately 75% correlated with the market overall (i.e., ñLARRY,M = 75%), whereas Curly’s returns are approximately 45% correlated with the market (i.e., ñCURLY,M = 45%). The covariance between Larry and Curly is 188.25. The standard deviation of a portfolio that is 2/3 of Larry and 1/3 of Curly is closest to: a) 3.5% b) 8.0% c) 14.9% d) 33.1%

please can you rewrite larry and curly return and probability of return because I can’t figure out which one is whoes

Posted by: cheros16 (IP Logged) [hide posts from this user] Date: September 24, 2008 03:31PM Mo Howard, CFA, intends to create a two-stock portfolio comprising Larry Corporation and Curly International. The possible returns of the two stocks are the following: Larry Return (“R”) Probability (“P®”) -5% 0.3 5% 0.4 10% 0.3 Curly Return (“R”) Probability (“P®”) -35% 0.3 35% 0.4 40% 0.3 The risk-free rate (“rf”) is 3%, and the standard deviation of the market index (“óM”) is 25%. In addition, Larry’s returns are approximately 75% correlated with the market overall (i.e., ñLARRY,M = 75%), whereas Curly’s returns are approximately 45% correlated with the market (i.e., ñCURLY,M = 45%). The covariance between Larry and Curly is 188.25. The standard deviation of a portfolio that is 2/3 of Larry and 1/3 of Curly is closest to: a) 3.5% b) 8.0% c) 14.9% d) 33.1% hopefully thats easier …

are you sure about the covariance between them? because it seems very high. 188,25?

So, is it C?

map1, doesn’t the covariance between the portfolios seem very large? 188,25?

Not to worry, that’s just a number, you’re not required to make a judgment on it.

yes it is C. can you explain how you calculated the Standard Deviation of each asset? For some reason i keep trying calculating expected return, and then calculating the sum of the squared differences to get variance. Which then gets SD by taking the square root. By the way, the Covariance is 188.25 … that is correct

yeah I know, but my calculations are blown up by this number and I also think that because correlation is between -1 and 1 this number for correlation is very big, because standard deviation for each portfolio is 2,29%. I think something is fishy with this number

That’s the right way of doing it, you just have to get it over with:) The question has lots of distractors (information that you really don’t need to solve it). Expected return on Larry: -5*0.3 + 5*0.4 + 10*0.3 = 3.5 Standard deviation of Larry = (((-5) - 3.5)^2*0.3+(5-3.5)^2*0.4+(10-3.5)^2*0.3)^(1/2) = 5.94 Expected return on Curly: -35*0.3 + 35*0.4 + 40*0.3 = 15.5 Standard deviation of Curly =(((-35) - 15.5)^2*0.3+(35-15.5)^2*0.4+(40-15.5)^2*0.3)^(1/2) = 33.12 Standard deviation of the portfolio = [(5.94*2/3)^2+(33.12*1/3)^2+2*2/3*1/3*188.25]^(1/2) = 14.87~14.9, that must be C.

yeah my mistake, the numbers we’re so high because I entered 5% not -5%. Have to pay more attention…

neagu.alexandru Wrote: ------------------------------------------------------- > yeah my mistake, the numbers we’re so high because > I entered 5% not -5%. Have to pay more > attention… i have the same problem. for some reason im not good with these calculators, i much prefer a TI-83 because you cant tell where youve screwed up the calculation.

map1 Wrote: ------------------------------------------------------- > That’s the right way of doing it, you just have to > get it over with:) > > The question has lots of distractors (information > that you really don’t need to solve it). > > Expected return on Larry: -5*0.3 + 5*0.4 + 10*0.3 > = 3.5 > Standard deviation of Larry = (((-5) - > 3.5)^2*0.3+(5-3.5)^2*0.4+(10-3.5)^2*0.3)^(1/2) = > 5.94 > > Expected return on Curly: -35*0.3 + 35*0.4 + > 40*0.3 = 15.5 > Standard deviation of Curly =(((-35) - > 15.5)^2*0.3+(35-15.5)^2*0.4+(40-15.5)^2*0.3)^(1/2) > = 33.12 > > Standard deviation of the portfolio = > [(5.94*2/3)^2+(33.12*1/3)^2+2*2/3*1/3*188.25]^(1/2 > ) = 14.87~14.9, that must be C. thanks though map, appreciate it. i get it now. i only just started using the forum. i study alone and so this really helps. wish i had started doing it a bit sooner

map1 Wrote: ------------------------------------------------------- > That’s the right way of doing it, you just have to > get it over with:) > > The question has lots of distractors (information > that you really don’t need to solve it). > > Expected return on Larry: -5*0.3 + 5*0.4 + 10*0.3 > = 3.5 > Standard deviation of Larry = (((-5) - > 3.5)^2*0.3+(5-3.5)^2*0.4+(10-3.5)^2*0.3)^(1/2) = > 5.94 > > Expected return on Curly: -35*0.3 + 35*0.4 + > 40*0.3 = 15.5 > Standard deviation of Curly =(((-35) - > 15.5)^2*0.3+(35-15.5)^2*0.4+(40-15.5)^2*0.3)^(1/2) > = 33.12 > > Standard deviation of the portfolio = > [(5.94*2/3)^2+(33.12*1/3)^2+2*2/3*1/3*188.25]^(1/2 > ) = 14.87~14.9, that must be C. I assume this is the correct way to do it since i just started the problem and i have Larrys Expected return and his variance. The other information is really useless. As for the guy saying covariance is too large. its OK. correlation is between -1 and 1. covariance can be huge or small, doesnt really matter. I remember in my old stats classes my teachers hated covariance as a method of relationship. Their usefulness comes in the fact that they tell you without much calculation if its a POSITIVE relationship or a NEGATIVE relationship.

yeah this question was part of a series of questions. therefore, the other information was used to answer other questions. this is just the only one i didnt understand

neagu.alexandru Wrote: ------------------------------------------------------- > please can you rewrite larry and curly return and > probability of return because I can’t figure out > which one is whoes Alex, da-mi un mail la map1map@gmail.com.