Suppose the expected returns and standard deviations of Stocks A and B are E( R

Question

Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .093, E(RB) = .153, ?A = .363, and ?B = .623.

Calculate the expected return of a portfolio that is composed of 38 percent A and 62 percent B when the correlation between the returns on A and B is .53. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Calculate the standard deviation of a portfolio that is composed of 38 percent A and 62 percent B when the correlation between the returns on A and B is .53. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Calculate the standard deviation of a portfolio with the same portfolio weights as in part (a) when the correlation coefficient between the returns on A and B is ?.53. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .093, E(RB) = .153, ?A = .363, and ?B = .623.

Explanation / Answer

Hi,

The corrrect answer is as followS:

Expected Return = 0.093*38%+0.153*62%

=13.02%

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b) Standard Deviation = sqroot(0.38^2*0.363^2+0.62^2*0.623^2+2*0.38*0.62*0.53*0.363*0.623)

=47.40%

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c) Standard Deviation = sqroot(0.38^2*0.363^2+0.62^2*0.623^2-2*0.38*0.62*0.53*0.363*0.623)

=33.43%

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