Save Score: 0 of 2 pts 3 of 10 (6 complete) HW Score: 56.67%, 1 1.33 of 20 pts P

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Save Score: 0 of 2 pts 3 of 10 (6 complete) HW Score: 56.67%, 1 1.33 of 20 pts P8-3 (similar to) Question Help * as a way of applying what she has leaned in business school. Speaficaly, she is evaluating an investment in a portollo comprised of wo fims' ocommon stock. She has collected the following information about the common stock of Firm A and Firm B: E1 a. It Mary invests half b. Answer part a where the oorrelation between the c. Answer part a d. Answer part a where her money in each of the two common stocks, what is the portfolio's expected rate of return and standard deviation in portfolio return? where the correlation between the two common stock investments is equal to + 1 two common slock investments is equal to -1 a- d, desoribe the relationship between the correlation and the risk and return of the portfolio a.If Mary decides to invest 50% of her money in Frm A's common s expected rate of return ine porfolio is 15%. (Round to two doon, places) tock ard 50% in FirmDs common stock and ne correlation between hetwoscos s ro,thenthe The standard deviation in the portolo(Round to two deaimal places More Enter your answer in the answer box and then click Check Answer

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A B C D E F G H I 2 3 a) 4 5 Stock Expected Return Standard Return Weight 6 A 14% 18% 50% 7 B 16% 24% 50% 8 9 Correlation 0.70 10 11 Cov (A,B) =*S*B 12 0.03024 =D9*E6*E7 13 14 Portfolio return can be calculated as follows: 15 16 Expected return =wiri 17 18 Where wi and ri are the weights and return of assets Ai 19 20 Weight and returns of the stocks of the portfolio are as follows: 21 22 StockA StockB 23 Expected Return 14.00% 16.00% 24 Weights 50.00% 50.00% 25 26 Hence Portfolio return is calculated as follows: 27 Portfolio expected return =Sum of product of weight and return of each asset 28 15.00% =SUMPRODUCT(D24:E24,D23:E23) 29 30 Hence Portfolio return is   15.00% 31 32 Calculation of Standard Deviation of portfolio: 33 Portfolio variance is given by following formula: 34 Portfolio variance = w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(A, B) 35 Where wA and wB are weights of assets A and B, A and B are standard deviation of assets A and B. 36 Given the following data: 37 StockA StockB 38 Expected Return 14.00% 16.00% 39 Variance 3.24% 5.76% 40 Standard Deviation 18.00% 24.00% 41 Weight 50.00% 50.00% 42 Cov(A,B) 0.03024 43 Portfolio Variance =w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(A, B) 44 3.7620% =(D41*D40)^2+(E41*E40)^2+2*D41*E41*D42 45 46 Standard Deviation of Portfolio =Sqrt(Var) 47 19.40% =SQRT(D44) 48 49 Hence, 50 Expected return of the portfolio 15.00% 51 Standard Deviation of Portfolio 19.40% 52 53 b) 54 55 Stock Expected Return Standard Return Weight 56 A 14% 18% 50% 57 B 16% 24% 50% 58 59 Correlation 0.00 60 61 Cov (A,B) =*S*B 62 0 =D59*E56*E57 63 64 Expected return 15.00% =SUMPRODUCT(D56:D57,F56:F57) 65 Calculation of Standard Deviation of portfolio: 66 Portfolio variance is given by following formula: 67 Portfolio variance = w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(A, B) 68 Where wA and wB are weights of assets A and B, A and B are standard deviation of assets A and B. 69 Given the following data: 70 StockA StockB 71 Standard Deviation 18.00% 24.00% 72 Weight 50.00% 50.00% 73 Cov(A,B) 0 74 Portfolio Variance =w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(A, B) 75 2.2500% =(D72*D71)^2+(E72*E71)^2+2*D72*E72*D73 76 77 Standard Deviation of Portfolio =Sqrt(Var) 78 15.00% =SQRT(D75) 79 80 Hence, 81 Expected return of the portfolio 15.00% 82 Standard Deviation of Portfolio 15.00% 83 84 c) 85 86 Stock Expected Return Standard Return Weight 87 A 14% 18% 50% 88 B 16% 24% 50% 89 90 Correlation 1.00 91 92 Cov (A,B) =*S*B 93 0.0432 =D90*E87*E88 94 95 Expected return 15.00% =SUMPRODUCT(D87:D88,F87:F88) 96 Calculation of Standard Deviation of portfolio: 97 Portfolio variance is given by following formula: 98 Portfolio variance = w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(A, B) 99 Where wA and wB are weights of assets A and B, A and B are standard deviation of assets A and B. 100 Given the following data: 101 StockA StockB 102 Standard Deviation 18.00% 24.00% 103 Weight 50.00% 50.00% 104 Cov(A,B) 0.0432 105 Portfolio Variance =w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(A, B) 106 4.4100% =(D103*D102)^2+(E103*E102)^2+2*D103*E103*D104 107 108 Standard Deviation of Portfolio =Sqrt(Var) 109 21.00% =SQRT(D106) 110 111 Hence, 112 Expected return of the portfolio 15.00% 113 Standard Deviation of Portfolio 21.00% 114 115 d) 116 117 Stock Expected Return Standard Return Weight 118 A 14% 18% 50% 119 B 16% 24% 50% 120 121 Correlation -1.00 122 123 Cov (A,B) =*S*B 124 -0.0432 =D121*E118*E119 125 126 Expected return 15.00% =SUMPRODUCT(D118:D119,F118:F119) 127 Calculation of Standard Deviation of portfolio: 128 Portfolio variance is given by following formula: 129 Portfolio variance = w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(A, B) 130 Where wA and wB are weights of assets A and B, A and B are standard deviation of assets A and B. 131 Given the following data: 132 StockA StockB 133 Standard Deviation 18.00% 24.00% 134 Weight 50.00% 50.00% 135 Cov(A,B) -0.0432 136 Portfolio Variance =w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(A, B) 137 0.0900% =(D134*D133)^2+(E134*E133)^2+2*D134*E134*D135 138 139 Standard Deviation of Portfolio =Sqrt(Var) 140 3.00% =SQRT(D137) 141 142 Hence, 143 Expected return of the portfolio 15.00% 144 Standard Deviation of Portfolio 3.00% 145 146 e) 147 148 Correlation Expected Return St. Deviation 149 0.7 15.00% 19.40% 150 0 15.00% 15.00% 151 1 15.00% 21.00% 152 -1 15.00% 3.00% 153 154 Expected return remains constant when correlation changes. 155 Standard deviation of the portfolio decreases with decrease in correlation from 1 to -1. 156

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