Question Details

hypothetical indifference curves





 .	You plan to invest in Stock X, Stock Y, or some combination of the two. The expected return for X is 10% and X = 5%.  The expected return for Y is 12% and Y = 6%.  The correlation coefficient, rXY, is 0.75.

a.	Calculate rp and p for 100%, 75%, 50%, 25%, and 0% in Stock X.
b.	Use the values you calculated for rp and p to graph the attainable set of portfolios.  Which part of the attainable set is efficient? Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y.  Let an indifference curve be tangent to the efficient set at the point where rp = 11%.
c.	Now suppose we add a riskless asset to the investment possibilities. What effects will this have on the construction of portfolios?
d.	Suppose rM = 12%, M = 4%, and rRF = 6%.  What would be the required and expected return on a portfolio with P = 10%?
e.	Suppose the correlation of Stock X with the market, rXM, is 0.8, while rYM = 0.9.  Use this information, along with data given previously, to determine Stock X- and Stock Y- beta coefficients.
f.	What is the required rate of return on Stocks X and Y?  Do these stocks appear to be in equilibrium?  If not, what would happen to bring about an equilibrium?





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