Question

Stocks A and B have the following​ returns: Stock A Stock B 1 0.09 0.07 2...

Stocks A and B have the following​ returns:

 Stock A Stock B 1 0.09 0.07 2 0.06 0.01 3 0.12 0.06 4 −0.02 0.02 5 0.08 −0.04

a. What are the expected returns of the two​ stocks?

b. What are the standard deviations of the returns of the two​ stocks?

c. If their correlation is 0.47

what is the expected return and standard deviation of a portfolio of 75​%

stock A and 25​% stock​ B?

 Year Stock A Stock B 1 9.00% 7.00% 2 6.00% 1.00% 3 12.00% 6.00% 4 -2.00% 2.00% 5 8.00% -4.00% a Average= 6.60% 2.40% b Standard dev= 5.27% 4.39%
 Where Average or Mean = Sum of all observations/Count of all observations Sample Standard deviation =((∑k=1 to N (observationk – average))/(N-1))^(1/2)

c

 Expected return%= Wt Stock A*Return Stock A+Wt Stock B*Return Stock B Expected return%= 0.75*0.066+0.25*0.024 Expected return%= 5.55 Variance =( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB)) Variance =0.75^2*0.0527^2+0.25^2*0.0439^2+2*0.75*0.25*0.0527*0.0439*0.47 Variance 0.00209 Standard deviation= (variance)^0.5 Standard deviation= 4.57%