Two-Asset Portfolio (PLEASE NOTE THAT NUMBERS ARE DIFFERENT THAN IN TEXTBOOK!) S

Question

Two-Asset Portfolio (PLEASE NOTE THAT NUMBERS ARE DIFFERENT THAN IN TEXTBOOK!)

Stock A has an expected return of 13% and a standard deviation of 35%. Stock B has an expected return of 16% and a standard deviation of 65%. The correlation coefficient between Stocks A and B is 0.2. What is the expected return of a portfolio invested 20% in Stock A and 80% in Stock B? Round your answer to two decimal places.

________ %

What is the standard deviation of a portfolio invested 20% in Stock A and 80% in Stock B? Round your answer to two decimal places.

________ %

Explanation / Answer

I . The expexted return from the portfolio, formula =

Percentage of Investment in A * Expected return from A + Percentage of Investment in B * Expected return from B

Stock A = 20% Investment and return 13%

Stock B = 80% Investment and return 16%

Expected Return = 13 * 0.2 + 16 * 0.8 = 2.6 + 12.8 = 15.4%

Therefore, Expected return from Portfolio = 15.40%

II. Calculation of Standard Deviation of a Portfolio:

The formula = Square root of { S.D of A2 * % of Investment in A2 + S.D of B2 * % of Investment in B2 +

2 * % of Investment in A * %of Investment in B* SD of A * SD of B * Correlation Coefficiant A and B }

After Inserting the values in above formula, we get

352 *  0.22 + 652 *  0.82 + 2 * 0.2 * 0.8 * 35 * 65* 0.2

= Square root of (2898.60) = 53.83

Theerefore, Standard Deviation of Portfolio = 53.83

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