Question

a. Suppose you purchased 1,600 shares of Pan Am Airlines at the beginning of the year for $17.23. By the end of the year, the stock price had appreciated to $18.63. At the end of the year, Pan Am paid a dividend of $0.55 per share. Calculate your total return percentage on this investment over the year.

b. Consider the data provided in the table below for a portfolio of assets A and B. The portfolio weights and variances are given in the table. The variances are expressed in decimal form. For example, if the standard deviation is 50%, then the variance is 0.5² = 0.25. The correlation of returns of the two assets is negative −1.00.

	Asset A	Asset B
Portfolio Weights	0.75	0.25
Variances	0.1444	0.0625
Standard Deviation	0.38	0.25

What is the standard deviation of the portfolio?

Answer 1

Return on investment = [(investment at end of year - investment at beginning of year)+dividends]/investment at beginning of year

divident per share = 0.55

Return on investment = [(18.63-17.23)+0.55]/17.23

= 0.1132

Return Percentage = 11.32%

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Formula for SD of portfolio

=

Vw 12012 + w220 22 + 2w1w2cou(1,2))

where w = asset weights , $\sigma =$ SD of assets

covariance(1,2) calculation

correlation coefficient = (cov1,2)/$\sigma 1\sigma 2$

-1 = cov(1,2)/0.38*0.25

cov(1,2) = -1*0.38*0.25

= -0.095

=

V0.75% +0.382 +0.252 * 0.25 +2+0.75 +0.25 + (-0.095)

=0.2225

=22.25%