Question

Your client has

$ 97 comma 000$97,000

invested in stock A. She would like to build a​ two-stock portfolio by investing another

$ 97 comma 000$97,000

in either stock B or C. She wants a portfolio with an expected return of at least

14.5 %14.5%

and as low a risk as​ possible, but the standard deviation must be no more than​ 40%. What do you advise her to​ do, and what will be the portfolio expected return and standard​ deviation?

	Expected Return	Standard Deviation	Correlation with A
A	1717​%	4545​%	1.001.00
B	1212​%	3535​%	0.140.14
C	1212​%	3535​%	0.280.28

The expected return of the portfolio with stock B is

​(Round to one decimal​ place.)The expected return of the portfolio with stock C is

​(Round to one decimal​ place.)The standard deviation of the portfolio with stock B is

​(Round to one decimal​ place.)

The standard deviation of the portfolio with stock C is

Answer 1

Return 3 Expected of Portfolio with Stock A and stock B. RATB = RAX WA + 2 x WB where RA= Expected Retum of stock A ra1000 x100 - 50l or 0.50 WA = Weight of stock A LaTood +97000 RB = expected Return of stock B WB = Weight of stock B. KA+B - 17X0.50 + 12x0.50 = 14.59 2 RATC = 1780.50 + 12 40.50 = 14.5% Expected standard deulation icf Portfolio is given by. A+B = 2² +242 + 200 WA WAJA, B where JA = Standard deviation of stock a JB - Standard deviation of stock B 8A, B = Correlation of A and B. 3) Ate - 1245)2 (0.50) +(35)2 (0:50)2 + 2x45X35X0.50 x0.50 x0.14 2 506.25 + 306.25 + 110.25 =1922.75 = 30-38% 4) 6 =145) (0.5032 +(35)2(0.50)2 + 2x45x35 x0.50 x0.50 X0:28 2 V 506.25 + 306.25 + 220.50 = 1033 32.14% Decision - It is better to invest $97,00D in Stock B because Expected return is 14.5% of portfolio of A & B and risk is lessee by' 1.76') at 30.38%

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