Question

Mary, a finance student at IBS, hold a portfolio which consists three stocks (one each) of: stock A, stock B, and stock C. Please note the following information about these stocks:

	Stock A	Stock B	Stock C
Price	$80	$100	$70
Return	10%	8%	13%
Standard deviation	0.35	0.1	0.5

[Quantitative Methods for Finance – FINB113] – Examination, Version [A]

Page 2 of 3

Correlation between A and B	0.2
Correlation between B and C	0.4
Correlation between A and C	0.3

Questions:

a- Please calculate the portfolio’s expected return

b-Please calculate the portfolio’s variance

Answer 1

Mary hold a portfolio Consists of 3 stock ( one each ) of Stock A, B,C

Particulars	Price
Stock A	$80
Stock B	$100
Stock C	$70
Total	$250

Weight of A = $ 80/$ 250= 0.32

Weight of B = $ 100/$ 250=0.40

Weight of C = $ 70/$ 250=0.28

a) We know that portfolio Expected return = Return on individual stock * Weights

=  RAWA+RBWB+RCWC

  = ( 10)(0.32)+( 8)(0.40)+(13)(0.28)

= 10.04%

Hence Return on Portfolio is 10.04%

b) we know that portfolio variance

0.049424 ( or ) 4.9424%

Hence Standard deviation of a portfolio is 4.9424%