Question

question 3

Your portfolio consists of two stocks. You have $2000 in stock A and $8000 in stock B. The returns for stock A have a standard deviation of 20% and the returns for stock B have a standard deviation of 10%. The correlation coefficient between A and B is 0.6. What is your portfolio standard deviation?

Select one:

a. 9.8%

b. 11.2%

c. 6.8%

d. 10.2%

e. 10.9%

question 4

If investors require a 5.5% nominal return and the expected inflation rate is 2%, what is the expected real return?

Select one:

a. 3.88%

b. 3.04%

c. 3.43%

d. 2.21%

e. 2.94%

Answer 1

Part 3:

Weight of Stock A = 2,000/ 10,000 = 0.2

Weight of Stock B = 8,000/ 10,000 = 0.8

Standard deviation of stock A = 20%

Standard deviation of stock B = 10%

Standard Deviaiton of portfolio = (0.2² * 20%² + 0.1² * 10%² + 2 * 0.2 * 0.8 * 20% * 10% * 0.6)^0.5

Standard Deviaiton of portfolio = (0.00160 + 0.0064 + 0.00384)^0.5

Standard Deviaiton of portfolio = (0.011840)^0.5

Standard Deviaiton of portfolio = 10.9%

Option e is correct

Part 4:

Nominal return = 5.5%

Inflation rate = 2%

(1 + Nominal rate) = (1 + Inflation rate) * (1 + real rate)

(1 + 5.5%) = (1 + 2%) * (1 + real rate)

Real rate = 1.055/ 1.02 - 1

Real rate = 3.43%

Option c is correct