Question

15. A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is A).583 B).225 C).327 D).128

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

А В C 1 2 Portfolio Weight Standard deviation 15 Stock A 24% 60% Stock B 40% 18% 5 Variance of Portfolio 6 0.0380 7 Correlation coefficient(A,B) 0.583 8 9 10 24 Holding period return Ending price Beginning price Cash Dividend 11 25% $18.00 12 $16.00 13 $2.00 14 15

Cell reference -

Jix E13 A B C E 2 15 Portfolio Weight Standard deviation Stock A Stock B 0.6 0.24 - 1-C3 0.18 Variance of Portfolio 0.038 (C6-(C3 D3)^2-(C4*D4)^2)/(2*C3#C4*D3* D4) Correlation coefficient(A, B) Holding period return Ending price Beginning price 0.25 11 24 12 18 16 13 |(C11*C13)-(C12-C13) Cash Dividend 14 15 1C

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.