Question

Portfolio P consists of Stock X and Stock Y. Stock X weight is 70%. Stock X expected return is 14%, Stock Y expected return is 10%. Stock X standard deviation of return is 3%, Stock Y standard deviation of return is 1%. Correlation of Stock X and Stock Y returns is -0.46. Expected portfolio P return is:

		6.91%
		8.50%
		12.80%
		13.26%

Answer 1

The expected portfolio return is the weighted average returns of its constituents wheretge weights are the percentage invested in each constituent. As the portfolio contains only X and Y. % investment in Y is (1-0.70)

Expected portfolio return = (%invested in stock X)*(expected return of stock X) + (%invested in stock Y)*(expected return of stock Y)

= (0.70*14) + (1-0.70)*(10)

= (9.8 + 3)%

= 12.8%

Thus, expected return of portfolio is 12.8%. The third option is correct.