Question

,

Stocks A and B have the following​ returns:

Stock A

Stock B

1

0.09

0.07

2

0.07

0.04

3

0.12

0.04

4

−0.03   

0.02

5

0.08

−0.05   

a. What are the expected returns of the two​ stocks?

b. What are the standard deviations of the returns of the two​ stocks?

c. If their correlation is 0.46 ,what is the expected return and standard deviation of a portfolio of

76​% stock A and 24​% stock​ B?

a. What are the expected returns of the two​ stocks?

The expected return for stock A is _____?

​The expected return for stock B is ______?

b. What are the standard deviations of the returns of the two​ stocks?

The standard deviation of the return for stock A is _____?

​The standard deviation of the return for stock B is _____?

​c. If their correlation is 0.46 what is the expected return and standard deviation of a portfolio of 76​%

stock A and 24​% stock​ B?

The expected return for the portfolio is _____?

​The standard deviation of the return for the portfolio is ______?

​

Answer 1

a.

Expected Return of Stock A = (0.09+0.07+0.12+(-0.03)+0.08)/5

Expected Return of Stock A = 0.066

Expected Return of Stock B = (0.07+0.04+0.04+0.02+(-0.05)/5

Expected Return of Stock B = 0.024

b.

Standard Deviation of Stock A = 0.05683

Standard Deviation of Stock B = 0.04506

c.

Portfolio with Stock A(76%) and Stock B(24%) with correlation coefficient 0.46

Expected Return of Portfolio = 0.76*0.066 + 0.24*0.024

Expected Return of Portfolio = 0.05016 + 0.00576

Expected Return of Portfolio = 0.05592

Portfolio Variance = (w²_A*σ²(R_A) + w²_B*σ²(R_B) + 2*(w_A)*(w_B)*Cov(R_A, R_B))^0.5

Cov(R_A, R_B) = Correlation*σ(R_A)*σ(R_B)

Standard Deviation of Portfolio of Stock A and Stock B = 0.0445