6. You own a portfolio of investment in two stocks, A and B. Total investment in
ID: 2720057 • Letter: 6
Question
6. You own a portfolio of investment in two stocks, A and B. Total investment in stock A is valued at $6,500 and has an expected return of 11.2 percent. Stock B has an expected return of 8.1 percent. Total investment in stock B is $3,500. What is the expected return on the portfolio? (0.65*0.112)+(0.35*0.081)= 0.10115*100% =10.12%
7. Continuing from question 6, the standard deviation of stock A is 15%, while the standard deviation of stock B is 12%. If the two stocks have a correlation of -0.5, what is the standard deviation of the portfolio? How does this portfolio standard deviation compare to the standard deviation of stock A and stock B separately? Why is the portfolio standard deviation lower?
need answer for question 7.
Explanation / Answer
SDa= 0.15 Wa=0.65
SDb =0.12 Wb= 0.35
Corr = -0.50
Portfolio Variance = (SDa x Wa)^2 + (SDb x Wb)^2 + 2 xSDa xSDb x Wa x Wb x Corr
= ( 0.15 x 0.65)^2 +(012 x0.35)^ + 2x 0.15 x 0.12 x 0.65 x0.35 x(-0.50)
= 0.01127025 -0.004095
= 0.00717525
Standard deviation = variance^0.50
= 0.00717525^0.50
= 8.47%
Portfolio Standard deviation is lower as the correlation between the stocks is lower.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.