Year__________ Company A_______________ Company B 1________________ 12.6________

Question

Year__________ Company A_______________ Company B

1________________ 12.6_____________________ 8.3

2 ________________18.7_____________________ -23.5

3________________ 11.3_____________________ -2.2

4 _________________-9.8_____________________ 24.9

5_________________ 2.4______________________ 11.8

mean______________ ?_________________________ ?

std.dev._________ 11.0695 ___________________18.1020

a) Find the missing values for Company A and Company B stock.

b) If you kept the stock two years in your portfolio with 75% in Company A and 25% in Company B what was your return and risk of the portfolio combination?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

Mean = (Sum of Return of all the Years/Number of Years)

Company A's Mean = (12.6 + 18.7 + 11.3 - 9.8 + 2.4)/5 = 7.04%

Company B's Mean = (8.3 - 23.5 - 2.2 + 24.9 + 11.8)/5 = 3.86%

Part B:

1) Calculate Portfolio Return:

Company A's Revised Return for 2 Years = (12.6 + 18.7)/2 = 15.65%

Company's B Revised Return for 2 Years = (8.3 - 23.5)/2 = -7.60%

Portfolio Return = Company A's Revised Return*Company A's % + Company B's Revised Return*Company B's % = 15.65*.75 - 7.60*.25 = 9.8375% or 9.84%

2) Calculate Risk:

Variance = 1/(N-1)*[(15.65% - 9.8375%)^2 + (-7.60% - 9.8375%)^2] = .003785 (here N is 2)

Standard Deviation (Risk) = (Variance)^1/2 = (.003785)^1/2 = .183807 or 18.3807%

Thanks.

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