Question

Ebenezer Scrooge has invested 40% of his money in share A and the remainder in share B. He assesses their prospects as follows: A 16 23 Expected return (%) Standard deviation (%) Correlation between returns a. What are the expected return and standard deviation of returns on his portfolio? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) 20.20 % Expected return Standard deviation b. How would your answer change if the correlation coefficient were 0 or -0.60? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Correlation Coefficient 0 % Correlation Coefficient -0.60 Standard deviation

Answer 1

a

	Expected return%=	Wt Stock A*Return Stock A+Wt Stock B*Return Stock B
	Expected return%=	0.4*0.16+0.6*0.23
	Expected return%=	20.2
	Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
	Variance	=0.4^2*0.22^2+0.6^2*0.26^2+2*0.4*0.6*0.22*0.26*0.6
	Variance	0.04855
	Standard deviation=	(variance)^0.5
	Standard deviation=	22.03%

b

	Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
	Variance	=0.4^2*0.22^2+0.6^2*0.26^2+2*0.4*0.6*0.22*0.26*0
	Variance	0.03208
	Standard deviation=	(variance)^0.5
	Standard deviation=	17.91%

Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=0.4^2*0.22^2+0.6^2*0.26^2+2*0.4*0.6*0.22*0.26*-0.6
Variance	0.01561
Standard deviation=	(variance)^0.5
Standard deviation=	12.49%