Question

2: Consider the following 6 months of return for 2 stocks and a portfolio of those 2 stocks

                                    Jan                 Feb                   Mar                     Apr                May                   Jun

Stock A                     2%                    5%                   -6%                      3%                -2%                     4%

Stock B                     0%                     -3%                   8%                     -1%                4%                     -2%

Portfolio                  1%                     1%                    1%                       1%                  1%                     1%

A: What is the average monthly return and standard deviation of returns for each of the two stocks?

B: what is the average monthly return and standard deviation of returns for the portfolio?

C: Is the portfolio more or less risky than the two stocks? Why?

EXPERTS ONLY PLEASE WITH EXPLANATIONS

Answer 1

A. Average Monthly Return A =(2%+5%-6%+3%-2%+4%)/6 = 1%
Average Monthly Return of B =(0%-3%+8%-1%+4%-2%)/6 = 1%
Standard Deviation of A =((2%-1%)^2+(5%-1%)^2+(-6%-1%)^2+(3%-1%)^2+(2%-1%)^2+(4%-1%)^2)/(6-1))^0.5 = 4.20%
Standard Deviation of B=((0%-1%)^2+(-3%-1%)^2+(8%-1%)^2+(-1%-1%)^2+(4%-1%)^2+(-2%-1%)^2)/(6-1))^0.5 = 4.20%

B . Average return of portfolio = 1%
Standard Deviation of Portfolio = 0%

c, The portfolio is less risky than the two stocks because the standard deviation of the portfolio is 0 and hence risk is very low as compared to other stocks. Even though returns are same