Tyler Trucks stock has an annual return mean and standard deviation of 11 percen

Question

Tyler Trucks stock has an annual return mean and standard deviation of 11 percent and 46 percent, respectively. Michael Moped Manufacturing stock has an annual return mean and standard deviation of 10.6 percent and 52 percent, respectively. Your portfolio allocates equal funds to Tyler Trucks stock and Michael Moped Manufacturing stock. The return correlation between Tyler Trucks and Michael Moped Manufacturing is .5. What is the smallest expected loss for your portfolio in the coming month with a probability of 16 percent? (Negative amounts should be indicated by a minus sign. Omit the "%" sign in your response. Round your answer to 2 decimal places.)

Explanation / Answer

Answer Expected Return From Portfolio = (0.50*11%)+(0.50*10.6%) = 10.80% Portfolio Varaiance of Prtfolio = [(0.50)2(0.46)2+(0.50)2(0.52)2]+[2(0.50)(0.50)(0.46)(0.52)(0.5)] = 0.1803 Standrard deviation of Portfolio = Sqrt (0.1803) = 0.424617 = 42.46% Monthly Statistics Expectecd return = 10.80%*1/12 = 0.009 Monthly Std Deviation = 0.424617*1/12 = 0.035385 Expected Loss = 0.009-0.35385 Expected Loss @ 16% will be -0.34

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