Calculate portfolio expected return and SD return No need to answer a)... only b
ID: 2715565 • Letter: C
Question
Calculate portfolio expected return and SD return
No need to answer a)... only b) to d)
Suppose there are two common stocks available for investment, stock A and stock B, with the following characteristics: Expected return(r): .10 .40 Standard deviation(c): .30 .20 Correlation coefficient(p): -.7 Calculate the portfolio expected return and standard deviation of return for each of the following portfolios: Sketch (this does not have to be a work of art, but try to be careful) the feasible set of all portfolios composed of A and B. Suppose that there is now the opportunity to borrow or lend at the risk-free rate of return, which is 10%. Show on your sketch in part (B) how this changes the investment opportunities available. (Be sure to clearly label this "PART C".) Assume you are a rational investor and can invest in stock A, stock B, the risk-free security, or any combination thereof. Further assume that you have $150,000 and decide to invest $60,000 in the risk-free security and $90,000 in risky securities. Approximately how much money will you invest in Security B? Briefly explain how you arrived at your answer.Explanation / Answer
Particulars Stock A Stock B Expected Return r 0.10 0.40 Standard Deviation 0.30 0.20 Correlation Coefficient -0.70 Covariance -0.04 Portfolio Compositon Return Variance S.D Covariance 100.00 0.10 0.09 0.30 66.67 0.20 0.03 0.16 33.33 0.30 0.01 0.10 0.00 0.40 0.04 0.20 For an investment of $150,000.00 the amount to be invested in various securities Risk Free Security $60,000.00 Stock A $0.00 Stock B $90,000.00 Thus entire $90,000.00 is invested in Security B since in that proportion the since that point is on the eficient frontier and the return has increased even though the risk has also increased. Return $42,000.00
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