Question

what's the solution by using Excel sheet and Excel Formula?

3. Assume that you invest 36% of your wealth in stock A and 64% of your wealth in stock B. Let the standard deviation of stock A's return equal 19% and the standard deviation of stock B's return equal 29%. Let the correlation coefficient of return of Stock A with Stock B equal to -1. Further assume that the expected return of A is 14% and the expected return of stock B is 18%. Find the expected return, variance and standard deviation of your portfolio in percentage and percentage squared terms.

Answer 1

Weights: Wa = 0.36, Wb = 0.64

Returns: Ra = 0.14, Wb = 0.18

Standard Deviations: Sa = 0.19, Sb = 0.29

Correlation, Cr = -1

Expected return = Wa *Ra + Wb *Rb  = 0.36*0.14 + 0.64*0.18 = 0.1656 = 16.56%

Variance = (Wa *Ra )2 + (Wb *Rb )2 + 2*Cr*Wa *Ra * Wb *Rb =  (0.36*0.14)^2 + (0.64*0.18)^2 + 2*(-1)*0.36*0.14 *0.64*0.18

Variance = 0.004199 = 41.99 percentage squared

Standard deviation = 0.0647 = 6.47%