Question

Question: How did the overall risk and return change when you added the stocks together in a portfolio?

Unit 4 Discussion Table
Complete the required information in the table.
Stock Symbol	% of portfolio	Beta	Contribution to portfolio Beta	Expected Return (using CAPM)	Contribution to Portfolio Return
Apple	50%	1.31	0.5*1.31= 0.655	5.64+(21.9-5.64) *1.31= 26.94%	0.5 * 26.94 = 13.47%
Amazon	50%	1.34	0.5*1.34=0.670	5.64+(22.03-5.64) *1.34= 27.60%	0.5 * 27.60 = 13.80%
Portfolio Beta			0.655 + 0.670 = 1.3250	Portfolio Return	0.5 * 26.94 + 0.5 * 27.60 = 27.27%

Answer 1

Diversification is a method use by portfolio manager for risk reduction of portfolio. A ultimate goal of portfolio manager is to create such portfolio that provides higher return with minimum level of risk.

if one more stock is added in portfolio and new stock is negatively correlated with existing portfolio then risk of portfolio will decrease. again if risk of new stock added is lower then also risk of overall portfolio will reduce.

if expected return of new stock is more than existing portfolio then expected return of new portfolio will increase and expected return of new stock is lower than existing portfolio then expected return of new portfolio will reduce.