Question

A portfolio consists of Stock Aand Stock B. Data for the 2 stocks is shown below

Stock A: expected return		12%
Stock A: standard deviation		40%
Stock B: expected return		14%
Stock B: standard deviation		60%
Correlation between A and B		0.35
Stock A beta		0.90
Stock B beta		1.20
% portfolio in Stock A		45%
% portfolio in Stock B		55%

A Calculate the expected return of the portfolio

portfolio : expected return

B Calculate the standard deviation of the portfolio

portfolio: standard deviation

C.Calculate the beta of the portfolio

D Does the portfolio have more risk, less risk, or the same risk as the market. Explain.

E. Will your portfolio likely outperform, underperform, or perform the same as the market in a period when stocks are rapidly falling in value? Why?

PLEASE SHOW ALL WORK

Answer 1

Calculation of Expected return of portfolio:

Probability (1)	Expected return (2)	Expected return of portfolio (3) (1*2)
0.45	12%	5.4%
0.55	14%	7.7%
	Expected return	13.1%

Calculation of standard deviation of portfolio:

Varinace = (0.45)^2*(0.4)^2+(0.55)^2*(0.6)^2+2*0.45*0.55*0.4*0.6*0.35

= 0.0324+0.1089+0.04158

= 0.18288

Standard deviation = Square root of Variance

= square root of 0.18288

= 42.76%

(NOTE: questions from c to e cannot be solved since the stocks individual beta is missing in the picture attached .please understand and upvote)