Question

Suppose you are given the following information about 2 stocks, what is the return standard deviation of a portfolio weighted 70% in stock A and 30% in stock B?

• E(RA)=16%E(RA)=16%
• E(RB)=8%E(RB)=8%
• σA=38%σA=38%
• σB=16%σB=16%
• -0.008674

Answer 1

Expected return portfolio = Weight of Stock A * Expected return Stock A + Weight of Stock B * Expected return of Stock B

Expected return of portfolio = 70% * 16% + 30% * 8%

Expected return of portfolio = 13.60%

Standard Deviation of portfolio = (Weight of Stock A * Standard Deviation of Stock A)² + (Weight of Stock B * Standard Deviation of Stock B)² + (2 * Weight of Stock A * Weight of Stock B * Covariance of Stock A & Stock B)

Standard Deviation of portfolio = (70% * 38%)² + (30% * 16%) + (2 * 70% * 30% * (-0.008674))

Standard Deviation of portfolio = 0.06941692

Standard Deviation of portfolio = 26.3471% or 26.35%