Flirting with Risk
|FINANCIAL MANAGEMENT 501 |
|Case 17: Flirting with Risk |
Answers to Questions of Case 17
1. Imagine you are Bill. How would you explain to Mary the relationship between risk and return of individual stocks?
As …show more content…
Below is the table (Table 4) which includes the expected return and the standard deviations for equal investments in High-Tech and Counter-Cyclical stocks. Expected value is 0,0545 and the standard deviation is 0,0132. The risk level is less than the risk level of investing in only one of the two stocks ( See the excel file for standard deviations of non-diversified portfolio). The expected return is realistic since there is not much difference when compared with non-diversified investments’ expected returns. In other words the expected results are not very high which makes them realistic.
9. What would happen if Mary were to put 70% of her portfolio in the High-Tech stock and 30% in the Index Fund? Would this combination be better for her? Explain.
According to Table 1 the expected return on the non-diversified investment to High-Tech stock is 0,05. When the portfolio is diversified as stated in the question, the expected return would be as seen in Table 5:
The expected return on this diversified investment is 0,0527 which is less than the expected return from equal investments to High-Tech and Counter-Cyclical Companies since its expected return is shown in Table 4 as 0,0545. On the other hand the standard deviation of this investment is also higher than of the equal investments to High-Tech and Counter-Cyclical