Expected Monthly Returns Standard deviation of
monthly returns
Original portfolio 0.53% 2.12%
XYZ Company 1.45 3.02
The correlation coefficient of XYZ stock returns with the original portfolio is .35. Assuming Jane sells the XYZ stock and replaces it with the government securities yielding 0.3% monthly, calculate the:
a)Expected return of new portfolio =( 0.53%+0.3%)/2 = 0.415%
b) Weight ( W ) = (S.D of Govt Security)^2- Cov ( Portfolio, Govt Security ) / (SDof portfolio)^2 +(SD of Govt Security)^2- 2 Cov ( Portfolio,Govt Sec)
0.11 = 0^2 - Cov ( Portfolio, Govt Security) / (2.12)^2 + 0^2 - 2 Cov ( Portfolio,Govt Sec)
Cov ( Portfolio,Govt Sec) = 0.6338
c) When r =0 , Variance of new portfolio = W1*SD of originalportfolio + W2*SD of Govt Security
=0.89*2.12% +0.11*0
= 0.018868
SD = Square root of 0.018868 = 0.1374
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