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You plan to invest in Stock X, Stock Y, or some combination of the two....

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Finance

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's and Stock Y's 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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