Question

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?

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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