Homework Answers
a. Yes it is possible to construct a portfolio from two stocks (stock A & stock B) so that the portfolio is risk free. Risk free portfolio can be constructed by selecting the stocks in the proportion so that standard deviation of the portfolio should be zero.
b. Now calculate the Expected return of portfolio in following manner where Standard deviation of portfolio is zero. (proportion of investments of stock A and stock B is calculated by trial and error method)
|
Expected return |
Investment Proportion |
Standard Deviation |
Correlation (A,B) |
|
|
Stock A |
4% |
67.86% |
27% |
|
|
Stock B |
11% |
32.14% |
57% |
-1 |
|
Total |
100.00% |
|||
|
Expected return of portfolio |
6.25% |
|||
|
Standard deviation of portfolio |
0.00% |
Formulas used in excel calculation:
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