(a) Determine the expected return of security X (b) To reduce the systematic risk of the portfolio, Anna is considering 3 securities to  add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and  Security C has a beta of -0.3. Discuss which security will be most effective in  reducing the portfolio’s systematic risk? How would portfolio expected return  change (higher or lower) if you add this security?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

(a) Determine the expected return of security X

(b) To reduce the systematic risk of the portfolio, Anna is considering 3 securities to 
add to the portfolio. Security A has a beta of 0, security B has a beta of 0.5 and 
Security C has a beta of -0.3. Discuss which security will be most effective in 
reducing the portfolio’s systematic risk? How would portfolio expected return 
change (higher or lower) if you add this security?

Anna holds a portfolio comprising the following 3 stocks: X, Y and Z.
Amount $'000
Beta
2,000
1.3
1,000
1.0
500
0
Investment
Security X
Security Y
Security Z
Expected Return
10%
2%
Transcribed Image Text:Anna holds a portfolio comprising the following 3 stocks: X, Y and Z. Amount $'000 Beta 2,000 1.3 1,000 1.0 500 0 Investment Security X Security Y Security Z Expected Return 10% 2%
Expert Solution
steps

Step by step

Solved in 2 steps with 2 images

Blurred answer
Knowledge Booster
Optimal Portfolio
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education