Question

Suppose the expected returns and standard deviations of Stocks A and B are E(R_A) = .080, E(R_B) = .140, σ_A = .350, and σ_B = .610.

a-1. Calculate the expected return of a portfolio that is composed of 25 percent A and 75 percent B when the correlation between the returns on A and B is .40. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected return 12.5 %

a-2. Calculate the standard deviation of a portfolio that is composed of 25 percent A and 75 percent B when the correlation coefficient between the returns on A and B is .40. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Standard deviation            % ?????

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 A and B is −.40. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Standard deviation              % ?????

Answer 1

a-1. & a-2.

	Expected return	Investment Proportion	Standard Deviation	Correlation
A	0.080	25%	0.350
B	0.140	75%	0.610	0.40
Total		1
Expected return of portfolio	12.50%
Standard deviation of portfolio	49.90%

Expected return is 12.5%

Standard deviation is 49.90%

b.

	Expected return	Investment Proportion	Standard Deviation	Correlation
A	0.080	25%	0.350
B	0.140	75%	0.610	-0.40
Total		1
Expected return of portfolio	12.50%
Standard deviation of portfolio	43.00%

Standard deviation is 43.00%

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