Question

Company A has a mean of 20% and a standard deviation of 7% Company B has...

Company A has a mean of 20% and a standard deviation of 7%

Company B has a mean of 16% and a standard deviation of 5.50%

The correlation coefficient for the return of companies A and B is 2.0

Assume you will invest 65% in Company B and 35% in Company A

What is the annual portfolio return?

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Answer #1

W1 = Weight of company A

W2 = Weight of company B

SD1 = Standard deviation of company A

SD2 = Standard deviation of company B

CORR = Correlation

Portfolio return = (W12sd12 + W22SD22 + 2*W1*W2*CORR*SD1*SD2)1/2

Portfolio return = [(0.35)2(0.07)2 + (0.65)2(0.055)2 + 2 * 0.35 * 0.65 * 2 * 0.07 * 0.055]1/2

Portfolio return = [0.1225*0.0049 + 0.4225*0.003025 + 0.0035035]1/2

Portfolio return = [0.00060025 + 0.00127806 + 0.0035035]1/2

Portfolio return = 0.0734 or 7.34%

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