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2b. Calculate the expected return and standard deviation of a portfolio made up of 50% stock...

2b. Calculate the expected return and standard deviation of a portfolio made up of 50% stock C and 50% stock D if the correlation is -0.75.

Probability Stock C Weighted Return Expected Return Deviation SQd Dev. Prob * Sqrd Deviaiton
0.3 -10% -3.00% 12.50% -22.50000% 0.0506 0.0151875
0.5 15% 7.50% 12.50% 2.50000% 0.0006 0.0003125
0.2 40% 8.00% 12.50% 27.50000% 0.0756 0.015125
Variance 3.06%
Standard Deviation 17.50%
Probability Stock D Weighted Return Expected Return Deviation SQd Dev.
0.3 25% 7.50% 12.50% 12.500% 0.0156 0.0046875
0.5 10% 5.00% 12.50% -2.500% 0.0006 0.0003125
0.2 0% 0.00% 12.50% -12.500% 0.0156 0.003125
Variance 0.813%
Standard Deviation 9.014%
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Homework Answers

Answer #1

Expected return on portfolio= (Return on Stock C * Weight of stock C) + (Return on Stock D* Weight of Stock D)

= 12.50*0.50 + 12.50*0.50

= 6.25 + 6.25

= 12.50%

Portfolio standard deviation is calculated as

Where, is portfolio standard deviation

wc and wD are weights of stock C and D.

and are standard deviation of stock C and D respectively.

is the correlation coefficient between returns of stock C and D.

= 6.128

Standard eviation of portfolio is therefore = 6.128%

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