Suppose Target\'s stock has an expected return of 17% and a volatility of 39%, H

Question

Suppose Target's stock has an expected return of 17% and a volatility of 39%, Hershey's stock has an expected return of 15% and a volatility of 30%, and these two stocks are uncorrected. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? Consider a new stock with an expected return of 16.0% and a volatility of 28%. Suppose this new stock is uncorrected with Target's and Hershey's stock. b. Is holding this stock alone attractive compared to holding the portfolio in (a)? c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio? Explain. a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? The expected return is %. (Round to one decimal place.) The volatility is %. (Round to one decimal place.) Consider a new stock with an expected return of 16.0% and a volatility of 28%. Suppose this new stock is uncorrelated with Target's and Hershey's stock. b. Is holding this stock alone attractive compared to holding the portfolio in (a)? (Select the best choice below.) A. No, a combination of the Hershey and Target stocks has the same expected return but with a lower volatility. B. No, Target dominates the new stock. C. Yes, the new stock dominates Hershey, so you should hold this stock alone. D. Yes, the new stock dominates Target.

Explanation / Answer

a)Expected return of equal weight 50% each then
=(50%*17%)+(50%*15%)
=16%
Voltaility is same as standard deviation
std= variance^0.5

Portfolio variance = wA^2*std^2(RA) + wB^2*std^2(RB) + 2*(wA)*(wB)*Cov(RA, RB)
Since uncorrelated Cov(RA, RB) =0
=(.5^2*.39^2)+(.5^2*.3^2)
=6.27%
std=6.27%^2
=25.04%

b)option A since we can find the portfolio and new stock have same return but the porfolio has less voltaility than the new stock.

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