Portfolio Selection & the Capm

In: Business and Management

Submitted By iforgot123
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Step 1. Comparing the three stocks, Maya has the highest standard deviation at 12.60 with an average return of 1.08. Harris has the lowest standard deviation at 5.8 with an average return of .58. The 28-year-old can accept a higher degree of risk than the 60-year-old, so he can invest in Maya with a highest average return. For the 60-year-old, I would suggest he invest in a lower volatile stock, such as Harris, because it involves less risk. However, with an option of investing in the S&P 500, I would suggest the retiree to invest in the S&P 500, because it has a lower standard deviation than Harris at 4.34 and a higher average return than Harris at .75.
Step 2. The shape of the curve shows the outcome of the risk-return combinations generated by the portfolio of the assets giving you the minimum variance for a given rate of return. Any set of combinations formed by the two assets with less than perfect correlation will lie within the minimum-variance portfolio and will be the convex. A perfect positive correlation +1 implies that as one security moves, either up or down, the other security will move in the same direction making a straight upward line. A perfectly negative correlation of -1 means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction.
Step 3. The older investor would take the portfolio including Harris and Urban, because they have the lowest standard deviation, hence it is a less risky investment. The younger investor would take the portfolio with Maya and Urban, because it has the highest returns, and can they can take on the risk. At an expected return of .75, the S&P 500 has a lower standard deviation than the stock portfolio with a standard deviation of 6.03 with the same return.
Step 4. Bonds and stocks will not react in the same way to adverse events. By…...

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