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

ID: 2646436 • Letter: S

Question

Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .098, E(RB) = .158, ?A = .368, and ?B = .628.

Calculate the expected return of a portfolio that is composed of 43 percent A and 57 percent B when the correlation between the returns on A and B is .58.

Calculate the standard deviation of a portfolio that is composed of 43 percent A and 57 percent B when the correlation between the returns on A and B is .58. (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 ?.58. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

a-1.

Calculate the expected return of a portfolio that is composed of 43 percent A and 57 percent B when the correlation between the returns on A and B is .58.

Standard deviation % b.

Explanation / Answer

Correlation between the returns = 0.58

Expected return of a portfolio = 0.098*43% + 0.158 *57%

= 0.04214+0.09006

=0.1322

Expected return of a portfolio = 13.22%

Answer for subpoint b)

Standard deviation of the portfolio:

formula for calculation of standard deviation = square root ( weight12 * Standard deviation12 +weight22 * Standard deviation22 + 2*weight 1 * standard deviation1*weight2*standard deviation2* correlation coefficint.

=Square root(43%2*0.3682+57%2*0.628+2*43%*0.368*57%*0.628)

=Square root(0.266462438)

=0.51619 rounded to 0.52

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

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

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