Question

Find the standard deviation of a portfolio made up of 50% Stock A and 50% Stock B

Stock	Expected Return	Beta	Standard Deviation	Correlation Coefficient ρ A,B
A	12%	1.3	0.26	0.7
B	13%	1.4	0.25

A firm falls on hard times and with no payment of dividends to both preferred and common shareholders, they later chose to reinstitute the payment of dividends. Is it true that the firm cannot pay a dividend to common shareholders without first paying dividends to preferred shareholder?

Answer 1

Q1:

Std dev= sqrt(variance)

Variance= (Wa*Sa)^2+(Wb*Sb)^2+ 2*Wa*Wb*Correl* Sa*Sb ; Correl=.7

where Sa, Sb are std dev of A and B respectively ; Wa and Wb are weights(50%)

ie: Variance= (.5*.26)^2+(.5*.25)^2+ 2*.5*.5*.7*.26*.25 =.055275

Std dev =sqrt(.055275) =23.51%

Q2:

Yes company has to pay dividend to preffered shareholders first. Both the type of share holders have their own advantage. Common shareholders have voting right wheras preference shareholders not have.