Question

Portfolio Risk and Return.

[Portfolio] You have the following investment portfolio: $5,000 is invested in the stock of Johnson & Johnson (JNJ), and $10,000 is invested in the stock of Intel Corp. (INTC).

1. [1 point] What are the portfolio weights (wJNJ and wINTC)?

2. [1 point] The return on the JNJ stock is 9% per year; the return on INTC stock is 11% per year. What is the return on your portfolio?

3. [2 points] The variance of returns on JNJ is σJNJ2=0.40, the variance of returns on INTC is σINTC2=0.60; The correlation coefficient between these two stocks is ρJNJ,INTC=0.7. What is the variance of your portfolio?

Answer 1

A) Total investment = $5000 + $10000 =$15000

Weight in JNJ = 5000/15000 = 33.33%

Weight in INTC = 10000/15000 = 66.67%

B) Return on Portfolio = (Weight of JNJ x Return on JNJ ) + (Weight of INTC x Retrun on INTC)

Return on Portfolio = (33.33% x 9%)+ (66.67% x 11%)

Return on Portfolio = 10.33%

C) Variance is square of standard deviation.

Standard Deviation of Portfolio =

Standard Deviation of Portfolio = 0.68083

Variance of Portfolio = (0.68083) ^ 2 = 0.4635

Variance of portfolio = 0.4635

Where,

W1= Weight in JNJ i.e. 33.33%

W2= Weight in INTC i.e. 66.67%

σ1 = Standard Deviation of JNJ i.e. 0.6324

σ2 = Standard Deviation of INTC i.e. 0.7745

Corr(1,2) = Correlation Coefficient between JNJ and INTC i.e. 0.7