Question

# Question 1: A medium-sized finance company is considering an investment portfolio of 40% of stock A...

Question 1: A medium-sized finance company is considering an investment portfolio of 40% of stock A and remaining 60% in stock B over the next four years (2020-2023). Given the returns of two stocks A and B in the table below over the four-year period, calculate the following: (3.5 marks)

 Stock A Stock B 2020 10% 9% 2021 12% 8% 2022 13% 10% 2023 15% 11%
1. Calculate the expected portfolio return, rp, for each of the four years.
2. Calculate the expected value of portfolio returns, rp, over the four-year period.
3. Calculate the standard deviation of expected portfolio returns over the four-year period.

The standard deviation of individual stocks are not required!

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%

Expected Return = [0.0940 + 0.0960 + 0.1120 + 0.1260] / 4
Expected Return = 0.4280 / 4
Expected Return = 0.1070 or 10.70%

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%

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