Question 1: A mediumsized finance company is considering an investment portfolio of 40% of stock A and remaining 60% in stock B over the next four years (20202023). Given the returns of two stocks A and B in the table below over the fouryear period, calculate the following: (3.5 marks)
Stock A 
Stock B 

2020 
10% 
9% 
2021 
12% 
8% 
2022 
13% 
10% 
2023 
15% 
11% 
The standard deviation of individual stocks are not required!
Answer A.
Weight of Stock A = 0.40
Weight of Stock B = 0.60
2020:
Portfolio Return = 0.40 * 10.00% + 0.60 * 9.00%
Portfolio Return = 9.40%
2021:
Portfolio Return = 0.40 * 12.00% + 0.60 * 8.00%
Portfolio Return = 9.60%
2022:
Portfolio Return = 0.40 * 13.00% + 0.60 * 10.00%
Portfolio Return = 11.20%
2023:
Portfolio Return = 0.40 * 15.00% + 0.60 * 11.00%
Portfolio Return = 12.60%
Answer B.
Expected Return = [0.0940 + 0.0960 + 0.1120 + 0.1260] / 4
Expected Return = 0.4280 / 4
Expected Return = 0.1070 or 10.70%
Answer C.
Variance = [(0.0940  0.1070)^2 + (0.0960  0.1070)^2 + (0.1120
 0.1070)^2 + (0.1260  0.1070)^2] / 3
Variance = 0.000676 / 3
Variance = 0.000225
Standard Deviation = (0.000225)^(1/2)
Standard Deviation = 0.0150 or 1.50%
Get Answers For Free
Most questions answered within 1 hours.