Question

Moe H. Burkowski just purchased 150 shares of PepsiCo (PEP) at $94.00 each and 500 shares of JetBlue Airways (JBLU) for $32.00 each. Moe has gathered the following information about these two stocks:

	PepsiCo (PEP)	JetBlue Airways (JBLU)
E(R)	6.42%	9.70%
σ	6.21%	9.18%
β	0.72	1.08

The covariance (COV) between the returns on these two stocks is -0.0029.

What is the risk (measured by the standard deviation) of his portfolio?

• 4.22%

• 1.40%

• 3.74%

• 1.78%

• 2.52%

Answer 1

Total value PepsiCo shares in the portfolio = $94.00*150 = $14,100

Total value JetBlue Airways shares in the portfolio = $32.00*500 = $16000

Weight of PepsiCo shares in the portfolio w(p) = 14,100/(14,100+16000) = 0.4684

Weight of JetBlue Airways shares in the portfolio w(j) = 1- 0.4684 = 0.5316

Standard deviation of PepsiCo shares s(p) = 6.21% = 0.0621

Standard deviation of JetBlue Airways shares s(j) = 9.18% = 0.0918

Standard deviation of portfolio =

Standard deviation of portfolio = ((0.4684*0.0621)^2 + (0.5316*0.0918)^2 + 2*0.4684*0.5316*(-0.0029))^0.5

Standard deviation of portfolio = 0.04223 = 4.223%