What is the cxpccted rate of return on a portfolio that has S4.000 invested in S

Question

What is the cxpccted rate of return on a portfolio that has S4.000 invested in Stock A and $6,000 invested in Stock B? The expected rates of return on these two stocks arc 13 percent and 9 percent, respectively. A two-stock portfolio has 30 percent in Stock A, with an expected return of 21 percent and a standard deviation of 5 percent, and the remainder in Stock B. with an 18 percent expected return and a standard deviation of 2 percent. The correlation coefficient is 0.6. Determine the standard deviation for this portfolio.

Explanation / Answer

7-8)

expected return on portfolio= W1R1+W2R2

W= Weight of stock

R= return of stock

expected return of stock=0.4*0.13+0.6*0.09

=10.6%

7-9)standard deviation = (W21R21+W22R22+2W1W2R1R2C)1/2

W= Weight of stock

R= return of stock

C= coefficient corealation

standard deviation = (0.4)2(0.13)2+(0.6)2(0.09)2+2.0.4*0.13*0.6*0.09*0.6

=(0.005956)1/2

     =0.0717

= 7.17%

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