Question

Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .089, E(RB) = .149, σA = .359, and σB = .619. a-1. Calculate the expected return of a portfolio that is composed of 34 percent Stock A and 66 percent Stock B when the correlation between the returns on A and B is .49. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a-2. Calculate the standard deviation of a portfolio that is composed of 34 percent Stock A and 66 percent Stock B when the correlation between the returns on A and B is .49. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation of a portfolio with the same portfolio weights as in part (a) when the correlation coefficient between the returns on Stocks A and B is −.49. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

1

Expected return%=	Wt Stock A*Return Stock A+Wt Stock B*Return Stock B
Expected return%=	0.34*0.089+0.66*0.149
Expected return%=	12.86

2

Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=0.34^2*0.359^2+0.66^2*0.619^2+2*0.34*0.66*0.359*0.619*0.49
Variance	0.23067
Standard deviation=	(variance)^0.5
Standard deviation=	48.03%

3

Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=0.34^2*0.359^2+0.66^2*0.619^2+2*0.34*0.66*0.359*0.619*-0.49
Variance	0.13293
Standard deviation=	(variance)^0.5
Standard deviation=	36.46%