Question

Stocks A and B have the following returns: Stock A Stock B 1 0.08 0.04 2...

Stocks A and B have the following returns:

Stock A Stock B
1 0.08 0.04
2 0.04 0.03
3 0.13 0.04
4 -0.03 0.03
5 0.07 -0.05

Stocks A and B have the following​ returns:

Stock A

Stock B

1

0.080.08

0.040.04

2

0.040.04

0.030.03

3

0.130.13

0.040.04

4

negative 0.03−0.03   

0.030.03

5

0.070.07

negative 0.05−0.05   

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 0.45​, what is the expected return and standard deviation of a portfolio of 79​% stock A and 21​% stock​ B?

Homework Answers

Answer #1
Year Stock A Stock B
1 8.00% 4.00%
2 4.00% 3.00%
3 13.00% 4.00%
4 -3.00% 3.00%
5 7.00% -5.00%
a.Average= 5.80% 1.80%
b.Standard dev= 5.89% 3.83%
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%= 0.79*0.058+0.21*0.018
Expected return%= 4.96
Variance =( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance =0.79^2*0.0589^2+0.21^2*0.0383^2+2*0.79*0.21*0.0589*0.0383*0.45
Variance 0.00257
Standard deviation= (variance)^0.5
Standard deviation= 5.07%
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