Question

11. suppose the expected returns and standard deviations of Stock A and B are E(R) - 0.10, E(R) -0.14, -0.36, 0 = 0.61 Calculate the expected return and standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when correlation between the returns on A and B is 0.5

Answer 1

0.10 0.36 0.14 0.61 Correl 0.5 Formula below 40% 60% Exp Ret C D E F G 0.124 0.455 0.1 0.36 0.14 0.61 Correl 0.5 % 0.4 0.6 Exp Ret =D4*E10+E4*F10 =((E10*D5)^2+(F10*E

B A 0.10 0.36 0.10 0.14 0.14 0.61 Correl -0.5 А 40% 60% Exp Ret 0.124 0.319 Bookl - Microsoft Excel Home Insert Page Layout Formulas Data Review View Calculate Now usert nction EN Go Watch Window Math More & Trig - Functions a Define Name f Use in Formula Name Manager Create from Selection Defined Names Trace Precedents 5 Show Formulas Trace Dependents Error Checking Remove Arrows fx Evaluate Formula Formula Auditing Calculation Calculate Sheet Options Calculation AutoSum Recently Financial Logical Text Date & Lookup & - Used Time Reference Function Library G5 fx A B C D E H Er S 0.1 0.36 0.14 0.61 b) Correl -0.5 % 0.4 0.6 Exp Ret =D4*E10+E4*F10 =((E10*D5)^2+(F10*E
A negative correlation between A & B reduces standard deviation. While a perfect correlation of + 1 results in a standard deviation which is a weighted average of individual stock's standard deviation.