1.\"A portfolio is composed of two stocks, A and B. Stock A has a standard devia

Question

1."A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 12%, while stock B has a standard deviation of return of 5%. Stock A comprises 50% of the portfolio, while stock B comprises 50% of the portfolio. If the variance of return on the portfolio is 0.01, the correlation coefficient between the returns on A and B is _________. Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, write 0.05"

2. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 3%, while stock B has a standard deviation of return of 3%. The correlation coefficient between the returns on A and B is 1.Stock A comprises 70% of the portfolio, while stock B comprises 30% of the portfolio. The standard deviation of the return on this portfolio is _________. Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, write 0.05"

Explanation / Answer

Variance(P)=(WA×S.D(A))^2+(WB×S.D(B))^2+2×WA×WB×S.D(A)×S.D(B)×CORR.(AB)

1.

.01=(.5×.12)^2+(.5×.05)^2 +2×.5×.5×.12×.05×CORR.(AB)

.01=.0036+.000625+,003CORR(AB)

CORR(AB)=1.925

2.

Variance(P)=(.03×.7)^2+(.03×.3)^2 +2×.7×.3×.03×.93×1

Variance(P)=.000441+.000081+.000378

Variance(P)=.0009

S.D (P)=(.0009)^1/2

=.03

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