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History Bookmarks People WindowHelp xC Cheg Study Gulded Solutioxc Chegg Study Guided Solutio X 1010000003043020070000&ctx-brown1-001; 2ackEm-151 3868579490,0AAAOS 4. Portfolio expected return and risk collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolo, making portfoio risk analysis an integral part of the feld of frane·last lke stand-alone asetsard securities, port olies are a'so exposed to risk. Portfolio risk nefers to the passiblity that an investment portolio will not generate the investor's expected rate of return. Analyzing portolio risk and return involves the understanding of expected returns from a portolio Consider the folowing case: Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfollio are shown in the following table Percentage of Expected Standard Portfolio 20% Artemis Inc. Babish & Co Comell Industries Danforth Motors 38.00% 42.00% 12.00% 3.00% 47.00% What is the expected return on Andre's stock portfolie 915.68% 7.84% 14.11% 10.45% Suppose each stock in Andre's portfolio has a correlation coefficient of 0.4 (p 0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the part any dversfed four-stock prifoto is 43%·me prtfelio's itandard deviation (ae) most ikely 3

Explanation / Answer

1.

Expected return of the portfolio is the weighted average of individual returns

Expected return of the portfolio = 0.2*0.08 + 0.3*0.14 + 0.35*0.12 + 0.15*0.03 = 0.1045 = 10.45%

2.

Since the stocks within the portfolio are not perfectly correlated, i.e the correlation coefficient is less than 1, portfolio benefits from diversification, and standard deviation will be less than the weighted average of individual stocks in the portfolio.

So, standard deviation of the portfolio most likely is less than 43%.

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