Question

Your client has $101,000 invested in stock A. She would like to build a? two-stock portfolio by investing another $101,000 in either stock B or C. She wants a portfolio with an expected return of at least 14.0% and as low a risk as? possible, but the standard deviation must be no more than? 40%. What do you advise her to? do, and what will be the portfolio expected return and standard? deviation?

Expected Return Standard Deviation Correlation with A

A 16% 46% 1.00

B 12% 36% 0.17

C 12% 36% 0.26

The expected return of the portfolio with stock B is ___%.

The expected return of the portfolio with stock C is ___%

The standard deviation of the portfolio with stock B is ____%

The standard deviation of the portfolio with stock C is ____%

You would advise your client to choose ____ because it will produce the portfolio with lower standard deviation.

Answer 1

Stock	Invested Amt	Portfolio Weightage	Exptd Return	Stdev	Correlation Coeff	Potrtfolio Teturn	Portfolio SD
A	101000	50%	16%	46%	0.26	14%	11%
C	101000	50%	12%	36%

Stock	Invested Amt	Portfolio Weightage	Exptd Return	Stdev	Correlation Coeff	Potrtfolio Teturn	Portfolio SD
A	101000	50%	16%	46%	0.17	14%	11%
B	101000	50%	12%	36%

Formula

Portfolo ( Proportion of stock wa, w_b, return : r_a , r_b, Stdev : sd_a , sd_b )

Expected return of portfolio = w_a x r_a + w_b x r_b

_{Portfolio SD = [ (}w_a x r_{a )²} + (w_b x r_b)² + 2x r x w_a x r_a x w_b x r_b ]^0.5

r - correlation coefficiaent