finance hw

ch_6_cfa_template.xlsx

CFA_Prob3

Chapter 6 CFA Problem:
Problem 3: Abigail Grace has a $900,000 fully diversified portfolio. She subsequently inherits ABC Company
common stock worth $100,000. Her financial advisor provided her with the following estimates:
	Risk and Return Characteristics
	Expected Monthly Returns	Std Deviation of Monthly Returns
Original Portfolio	0.67%	2.37%
ABC Company	1.25%	2.95%
The correlation coefficient of ABC stock returns with the original portfolio returns is 0.40.
a. The inheritance changes Grace's overall portfolio and she is deciding whether to keep the ABC stock.
Assuming Grace keeps the ABC stock, calculate the:
i. Expected return of her new portfolio which includes the ABC stock. (use 4 decimal places)
Security	% invested	Exp return	Wtd E[r]
Original portfolio	90.00%
ABC stock	10.00%
		E[rp]
ii. Covariance of ABC stock returns with the Original Portfolio returns. (Use 6 decimal places)
Hint: Use Equation 6.2
Let OP = Original Portfolio and ABC = ABC stock
Std Dev(OP)
Std Dev(ABC)
Correlation
Covariance
iii. Standard deviation of her new portfolio which includes the ABC stock.
	Weight(OP)	Weight(ABC)	Variance(portfolio)	Std Dev (portfolio)
Portfolio	0.10	0.90

&F &A