Homework Answers
Portfolio variance =
Portfolio standard deviation = Portfolio variance1/2
Portfolio mean = wA x Mean of A + (1 - wA) x Mean of stock B
Also, Cov (A, B) = Correlation coefficient x Std dev of A x Std dev of B
Correlation = Cov (A, B) / (Std dev of A x Std dev of B) =
We now proceed to fill the table:
| Stock A | Stock B | ||
| Mean | 6% | 12% | |
| Variance | 1.71% | 2.67% | |
| Std dev | 13.08% | 16.34% | |
| Covariance | 0.50% | ||
| Correlation | 0.2340 | ||
| Proportion of A, wA | Portfolio Variance | Portfolio std dev | Portfolio Mean |
| 0% | 2.67% | 16.34% | 12.00% |
| 10.00% | 2.27% | 15.07% | 11.40% |
| 20.00% | 1.94% | 13.92% | 10.80% |
| 30.00% | 1.67% | 12.93% | 10.20% |
| 40.00% | 1.47% | 12.14% | 9.60% |
| 50.00% | 1.35% | 11.60% | 9.00% |
| 60.00% | 1.28% | 11.33% | 8.40% |
| 70.00% | 1.29% | 11.35% | 7.80% |
| 80.00% | 1.36% | 11.67% | 7.20% |
| 90.00% | 1.50% | 12.25% | 6.60% |
| 100.00% | 1.71% | 13.08% | 6.00% |
And then to plot the graph:
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