An investment portfolio in Singapore specializes in airline stocks and contains

Question

An investment portfolio in Singapore specializes in airline stocks and contains two of them. One is Singapore Airlines (mean: 0.12; standard deviation: 0.02), and it accounts for 30% of the portfolio shares. The other airline present in the portfolio is AirAsia (mean: 0.25; standard deviation: 0.15), a higher-risk, higherreturn investment.

What is the expected value and the standard deviation

of the portfolio if the coefficient of correlation

of the two stocks is 0.5?

b. What will they be if the correlation is 0.2

instead?

Explanation / Answer

Expected return on portfolio - (0.12*0.30) + (0.25*0.70) Expected return on portfolio - 21.10% Standard deviation of portfolio = (((0.02^2)(0.30^2) + (0.15^2)(0.70^2)+2(0.02)(0.30)(0.15)(0.70)(0.50))^1/2 (0.000036 + 0.011025 + 0.00063)^0.50 0.108125 Standard deviation of portfolio - 10.8125% If the correlation is 0.20, the expected return on portfolio would remain the same - 21.10% Standard deviation of portfolio = (((0.02^2)(0.30^2) + (0.15^2)(0.70^2)+2(0.02)(0.30)(0.15)(0.70)(0.20))^1/2 (0.000036 + 0.011025 + 0.000252)^0.50 0.106363 Standard deviation of portfolio - 10.6363%

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