Question

Two-stock Portfolio Stock A has an expected return of 12.50 percent and a standard deviation of 25.50 percent. Stock B has an expected return of 7.25 percent and a standard deviation of 30.45 percent. The correlation coefficient between Stock A and B is 0.23. The optimal weight of Stock A in a portfolio consisting of these two stocks is estimated to be _ , and the standard deviation of this portfolio is estimated to be Select one: O a. 61.35%; 21.63% O b. 26.33%; 75.79% o O o c. 57.31%; 24.35% d. 70.42%; 20.05% e. 75.79%; 24.88%

Answer 1

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

C D E Stock A Expected return Standard deviation Correlation 12.50% 25.50% 0.23 Stock B 7.25% 30.45% Optimal weight for minimum variance portfolio Weight of A Weight of B 61.35% 38.65% Standard deviation of Portfolio 21.63% 14

Cell reference -

Stock A Stock B Expected return Standard deviation Correlation 0.125 0.255 0.23 0.0725 0.3045 Optimal weight for minimum variance portfolio Weight of A Weight of B =(D4^2-C5*C4*D4)/(C4^2+D4^2-2*C5*C4*D4) =1-09 Standard deviation of Portfolio =SQRT{(C9*C4)^2+(C10*D4)^2+2*C9*C10*C4*D4*C5)

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