Question

(Computing the standard deviation for a portfolio of two nisky investments, Mary Guilt recently graduated from Nichols State University and is acous to begin investing her mengering a way of applying what she has leamed in business School Specifically, shevang e ment in a portfolio comprised of two ms' common stock. She has collected the following information about the common stock of F A and F H a. If Mary invests all her money in each of the two common stocks, what is the portfolio's expected rate of return and standard deviatonin portfolio retur? b. Answer part a where the correlation between the two common stock investments is equal to c. Answer part aware the correlation between the two common lock investments is to d. Answer part a where the correlation between the two common stock investments is equal to-1 e. Using your responses to questions de descabethro p between the c o nd then and return of the portfolio common stock and 50% in Form B's common stock and the conation between the two stocks 0.70, then the expected rate ofretum in the portfolios a. If Mary decides to invest 50% of the money in Two decimal places) Pound to The standard deviation in the porto ound to two decimal places) common stock and the correlation between the two stocks is zero then the expected rate of return in the portiolais (Round to b. If Mary decides to invest one of her money in Fim A common stock and son in two decimal places) The standard deviation in the port (Hound to two decimal places of the money in Firm As common stock and 50% in common stock and the correlation coefficient between the two stocks is 1. then the expected rate of return in the portfolio c. of Mary decides to invest (Pound to two decimal places) Click to select your answers)

Answer 1

A B C D E F G H I J K L M N O 1 2 A e) 3 Expected return 4 standard deviation 5 correlation B 0.17 0.15 0.7 0.19 0.21 As can be seen from the calculations, higher the correlation between the returns of the firms, higher is the risk and lower the correlation , lower is the risk (standard deviation), while the expected return remains constant and is independent of correlation B 0.5 0.5 portfolio 18.00% 16.64% 8 % in portfolio 9 10 Expected return 11 Standard deviation 12 13 b) 14 correlation 15 Expected return 16 Standard deviation 17 C) 18 correlation 19 Expected return 20 Standard deviation 21 d) 22 correlation 23 Expected return 24 Standard deviation 18.00% 12.90% 18.00% 18.00% 18.00% 3.00%

A 3 Expected return 4 standard deviation 5 correlation A 0.17 0.15 0.7 0.19 0.21 7 0.5 A 0.5 portfolio =SUMPRODUCT($B$8:$C$8,$B$3:$C$3) =SQRT((($B$8*$B$4)^2)+(($C$8*$C$4)^2)+(2*$B$8*$C$8*$B$4*$C$4*B5)) =SUMPRODUCT($B$8:$C$8,$B$3:$C$3) =SQRT((($B$8*$B$4)^2)+(($C$8*$C$4)^2)+(2*$B$8*$C$8*$B$4*$C$4*B14)) 8 % in portfolio 9 10 Expected return 11 Standard deviation 12 13 b) 14 correlation 15 Expected return 16 Standard deviation 17 C) 18 correlation 19 Expected return 20 Standard deviation 21 d) 22 correlation 23 Expected return 24 Standard deviation 25 =SUMPRODUCT($B$8:$C$8,$B$3:$C$3) =SQRT((($B$8*$B$4)^2)+(($C$8*$C$4)^2)+(2*$B$8*$C$8*$B$4*$C$4*B18)) =SUMPRODUCT($B$8:$C$8,$B$3:$C$3) =SQRT((($B$8*$B$4)^2)+(($C$8*$C$4)^2)+(2*$B$8*$C$8*$B$4*$C$4*B22))