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Stock A has an expected return of 18% and a standard deviation of 33%. Stock B...

Stock A has an expected return of 18% and a standard deviation of 33%. Stock B has an expected return of 13% and a standard deviation of 17%. The risk-free rate is 3.6% and the correlation between Stock A and Stock B is 0.2. Build the optimal risky portfolio of Stock A and Stock B. What is the standard deviation of this portfolio?

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Answer #1

Where
Stock A E[R(d)]= 18.00%
Stock B E[R(e)]= 13.00%
Stock A Stdev[R(d)]= 33.00%
Stock B Stdev[R(e)]= 17.00%
Var[R(d)]= 10.89%
Var[R(e)]= 2.9%
T bil Rf= 3.60%
Correl Corr(Re,Rd)= 0.2
Covar Cov(Re,Rd)= 0.0112
Therefore W(*d)= 0.2649
W(*e)=(1-W(*d))= 0.7351
Expected return of risky portfolio= 14.32%
Risky portfolio std dev = 16.62%

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