Question

1. Stocks X and Y have the following probability distributions: Returns Probability X Y 0.10 -5%...

1. Stocks X and Y have the following probability distributions:

Returns

Probability

X

Y

0.10

-5%

-22%

0.20

-2%

-3%

0.30

1%

6%

0.20

4%

17%

0.20

7%

24%

(8 points)

  1. If you form a 50-50 portfolio of the two stocks, calculate the expected rate of return and the standard deviation for the portfolio.      (Remember, you must calculate a new range of outcomes for the portfolio.)
  2. Briefly explain why the standard deviation for the portfolio would be less than the weighted average of the standard deviations for Stocks X and Y.

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Answer #1

B) According to Markowitz Portfolio theory ,when we invest in a portfolio the risk get diversify means the risk get reduced to a certain level but donesnot get eliminated . Whereas in case of weighted average the risk doesn't eliminated that much .

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