Question

Use the following information for the next 2 questions:

Stock	Value	E(R)	St. Dev
Walmart	$21,000	6%	9%
Netflix	$49,000	10%	12%

47) What is the expected return of this portfolio?

Question 47 options:

	6.4%
	8.8%
	9.6%
	11.2%

What is the standard deviation of this portfolio if their correlation is − 0.8?

Question 48 options:

	4.22%
	6.45%
	10.68%
	8.40%

Answer 1

1)

Total market value = 21,000 + 49,000 = 70,000

Weight of walmart = (21,000 / 70,000) = 0.3

Weight of Netflix = (49,000 / 70,000) = 0.7

Expected return = 0.3*0.06 + 0.7*0.1

Expected return = 0.018 + 0.07

Expected return = 0.088 or 8.8%

2)

Standard deviation = (W1^2Q1^2 + W2^Q2^+ 2W1*W2*Correlation*Q1*Q2)^1/2

Standard deviation = (0.3^2*0.09^2 + 0.7^2*0.12^2+ 2*0.3*0.7*(-0.8)*0.09*0.12)^1/2

Standard deviation = (0.09*0.0081 + 0.49*0.0144 - 0.003629)^1/2

Standard deviation = (0.000729 + 0.007056 - 0.003629)^1/2

Standard deviation = 0.0645 or 6.45%