Question

P 12-8 (similar to) 

Stocks A and B have the following returns: 

	Stock A	Stock B
1	0.08	0.05
2	0.04	0.02
3	0.12	0.05
4	-0.03	0.03
5	0.07	-0.04

a. What are the expected returns of the two stocks? 

b. What are the standard deviations of the returns of the two stocks? 

c. If their correlation is 0.45, what is the expected return and standard deviation of a portfolio of 66% stock A and 34% stock B? 

a. What are the expected returns of the two stocks? 

The expected return for stock A is _______ (Round to three decimal places.)

Answer 1

Using excel formula

	A	B
	Stock A	Stock B
1	0.08	0.05
2	0.04	0.02
3	0.12	0.05
4	-0.03	0.03
5	0.07	-0.04
Mean	5.60%	2.20%
Excel Formula	AVERAGE(A1:A5)	AVERAGE(B1:B5)
Standard Deviation	5.59%	3.70%
Excel Formula	STDEV(A1:A5)	STDEV(B1:B5)

Expected Return =Weight of A*Stock A+Weight of B*Stock B =66%*5.60%+34%*2.20% =4.44%
Standard Deviation =((Weight A*Standard Deviation of A)^2+(Weight B*Standard Deviation of B)^2+2*Weight A*Standard Deviation A*Weight B*Standard B*Correlation)^.5 =((66%*5.59%)^2+(34%*3.70%)^2+2*66%*34%*5.59%*3.70%*0.45)^0.5 =4.40%