The table below shows the standard deviations and correlation coefficients of th

ID: 2464730 • Letter: T

Question

The table below shows the standard deviations and correlation coefficients of the annual returns for five stocks: A, B, C, D, and E. (Please Included the solutions step by step)

a. Calculate the variance of the annual return on a portfolio with equal investments in each stock.
b. Calculate the beta of each stock in the table relative to a portfolio with equal investments in each stock.
c. Suppose you can invest in only two of the stocks in the table. What is the safest attainable portfolio under this restriction?

Correlation coefficients A B C D E A 1.00 0.28 0.46 -0.02 0.36 B 0.28 1.00 0.08 -0.09 0.21 C 0.46 0.08 1.00 -0.04 0.33 D -0.02 -0.09 -0.04 1.00 0.18 E 0.36 0.21 0.33 0.18 1.00 Standard deviation (%) 20.3 14.0 34.5 42.5 44.5

Explanation / Answer

Solution:

I can provide you answer of part a only...

Calculation of Variance of Annual Return on a Portfolio

Total

Standard Deviation (SD)

0.203

0.14

0.345

0.425

0.445

Variance (SD2)

0.041

0.020

0.119

0.181

0.198

Weight of Equal Investment

0.2

Variance of Annual Return (Variance x Weight)

0.008

0.004

0.024

0.036

0.040

0.1117

Variance of Annual Return on a Portfolio = 0.1117 or 11.17%