Please help with Portfolio expected reurn and risk!! Thanks so much!!! 2. Portfo
ID: 2787349 • Letter: P
Question
Please help with Portfolio expected reurn and risk!!
Thanks so much!!!
2. Portfolio expected return and risk Aa Aa An analyst is examining the following two-stock portfolio: StockPortfolio Weight Stock X Stock Y Expected Return 18.0% 11.0% Standard Deviation 35.0% 35.0% 0.55 0.45 What is the portfolio's expected return? 14.85% 13.80% 16.25% 13.45% 15.55% O O O If randomly selected stocks are added to the portfolio until the portfolio has no asset-speclfic risk remaining, which of the following is the best estimate of the portfolio's standard deviation of returns? 35% O 50% O 096 O 70% O 20% The tradeoff between risk and return is a cornerstone concept in finance. If a security offers a higher expected return, it must have hlgher risk. Look at the two stocks described in this problem. They have the same risk, but one stock has a higher expected return. Does this example contradict the tradeoff between risk and return? O No O YesExplanation / Answer
1.Portfolio expected return:
w1*R1+w2*R2
w1=Weight of Stock 1 in portfolio
R1=Return of stock1
w2=Weight of Stock 2 in portfolio
R2=Return of stock2
Portfolio expected return=0.55*18+0.45*11=14.85%
Answer=14.85%
2. Portfolio Standard Deviation:
S1, S2, S3……Sn are the standard deviation of the stocks 1, 2, 3 …n
If w1, w2 , w3 …wn are weight in the portfolio for stocks 1, 2,3 ….n
Portfolio Variance=(w1^2)*(S1^2)+(w2^2)(S2^2)+………….(wn^2)*(Sn^2)+2w1w2*Cov(1,2)+2w1w3*Cov(1,3)+………+w(n-1)wn*Cov(n,(n-1)
Cov(1,2)=Covariance of returns of asset1 and asset2
Portfolio Standard Deviation =Square root of Portfolio variance
If stocks are selected such that there is no asset specific risks are remaining:
This means Portfolio Variance=zero
The best estimate of Portfolio’s Standard Deviation of Returns =0%
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