Create a portfolio using the two stocks and information below: (Do not round int
ID: 2620225 • Letter: C
Question
Create a portfolio using the two stocks and information below:
(Do not round intermediate calculations. Record your answers in decimal form and round your answers to 4 decimal places. Ex. x.xxxx)
What is the variance of A?
What is the variance of B?
What is the Correlation (A,A)?
What is the Correlation (B,B)?
What is the Covariance (A,A)?
What is the Covariance (A,B)?
What is the Covariance (B,A)?
What is the Covariance (B,B)?
What is the expected return on the portfolio above?
What is the variance on the portfolio above?
What is the standard deviation on the portfolio above?
Expected Return Standard Deviation Weight in Portfolio Stock A 34.00% 19.00% 90.00% Stock B 9.00% 38.00% 10.00% ---------------------- ---------------------- ---------------------- ---------------------- Correlation (A,B) 0.1500 ---------------------- ----------------------Explanation / Answer
Variance of A
= Square of Standard deviation
= 0.19*0.19
= 3.61 %
Variance of B
= Square of Standard deviation
= 0.38*0.38
= 14.44 %
Correlation (A,A)
The correlation coefficient is a measure that determines the degree to which two variables' movements are associated.
So for the same variable it will be 1 only
Correlation (B,B)
The correlation coefficient is a measure that determines the degree to which two variables' movements are associated.
So for the same variable it will be 1 only
Covariance (A,A)
Covariance measures how the mean values of two variables move together
So between same variabes it will be 1 only
Covariance (B,B)
Covariance measures how the mean values of two variables move together
So between same variabes it will be 1 only
Covariance (A,B)
Covariance measures how the mean values of two variables move together
= Deviation of A X Deviation of B
= 0.19 X 0.38
= 0.0722
Covariance (B,A)
Covariance measures how the mean values of two variables move together
= Deviation of B X Deviation of A
= 0.38 X 0.19
= 0.0722
Expected Return on Portfolio
=( Expected return of A X Weight of A ) + ( Expected return of B X Weight of B )
= 34 X 0.9 + 9 X 0.1
= 30.6 + 0.9
= 31.5 %
Variance on the portfolio
LET STANDARD DEVIATION OF A = SDA
STANDARD DEVIATION OF B = SDB
WEIGHT OF A = WA
WEIGHT OF B = WB
= WAXWA X SDAXSDA + WBXWB X SDBXSDB + 2 X WAXWBXSDAXSDBXCORRELATION COEFFICIENT A,B
= 0.9X0.9X0.19X0.19 + 0.1X0.1X0.38X0.38 + 2X0.9X0.1X0.19X0.38X0.15
= 0.0326
Standard deviation on the portfolio
Square root of Variance
= Square root of 0.0326
= 18.06 %
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