73% | ? mathxl.com MGMT-326-002 ( Course Home Do Homework At The Beginning...Sup

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73% | ? mathxl.com MGMT-326-002 ( Course Home Do Homework At The Beginning...Suppose The Risk- Solved: Stocks A a... At The Beginning MGMT 326-Fundamentals of Corporate Finance- Berk/DeMarzo Homework: Chapter 12 Homework Score: 0 of 1 pt Gabriel Pacheco &1 4/1/18 2:40 PM Save 7 of 15 (6 complete) ? HW Score: 40%, 6 of 15 pts P 12-18 (similar to) Question Help * You have a portfolio with a standard deviation o 21% and an expected return of 16% You are considering adding one of the two stocks in the folowing table if after adding the stock you will have 20% of your money in the new stock and 80% of your money in your existing portfolio, which one should you add? Expected StandardCorrelation with Return 12% 12% Deviation 25% 16% Your Portfolio's Returns 0.4 0.7 Stock B Standard deviation of the portfolio with stock A is % (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer Check Answer Clear All remaining

Explanation / Answer

Calculation of Standard Deviation of the portfolio with Stock A:

Variance of Portfolio with Stock A = (Weight of Portfolio)2 * (SD of Portfolio)2 + (Weight of Stock A)2 * (SD of Stock A)2 + 2* Covariance of Portfolio & Stock A *Weight of Portfolio * Weight of Stock A+ SD of Portfolio * SD of Stock A

= (0.80)2 * (21)2 + (0.20)2 * (25)2 + 2*0.4*0.80*0.20*21*25

= 374.44

Standard Deviation of portfolio with Stock A is 19.35.

Same for Stock B)

Variance of Portfolio with Stock B = (0.80)2 * (21)2 + (0.20)2 * (16)2 + 2*0.7*0.80*0.20*21*16

= 367.744

Standard Deviation = 19.18

The Rate of Return of both stock is same but Standard deviation of portfolio with stock B is lower then stock A. so its better to invest in stock B

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