Question

Consider a portfolio that is long $19,000 of ABC and short $5,000 of DEF. ABC has an expected return of 1.0% and return volatility of 3.0%. DEF has an expected return of 0.5% and return volatility of 2.0%. The two shares have a return correlation of 0.4. What is the return volatility of this portfolio in dollars? Note: Your answer must be accurate to within one dollar.

Answer 1

Here, first we will calculate the expected return of the portfolio, followed by calculating the volatility of the portfolio.

Then multiplying the volatility by the expected return of the portfolio, we will get the volatility of returns in dollars.

See the attached images below for a complete solution.

Caladating Expected Return from independent returns stock 1 (ABC) = 1% of $19000 Expected return from Stock 2 (AEF) = 0.5% of 5000 Cow $250 deceturns: Now making a portfolio of Return on Stocki = $1900 Return on stock2 = $250 Calculating weights & Expected Portfolio Return: Total portfolio = $ 19000 - $5000 : $14000 weight of stock ABC = 19000/14000 = 1. 36 tock DEF= -5000 114000 - =-0-36 Expected lecture on Portfolio op = wir, twarz = 136 X 1900 +(-0-36) X250 = 25 84 - 90 - $2494 - Calculating return volatility : عورت کے ما بین 2 + 2ارک ربع + عربي لم = التعامل مطاRe =) <1-30% (0.03) + 60-302C0-02) + 2 x C1:30 -0.2) (0-03) - X(0.02) (0.4 = 0.001664+ 0.000051 +(-0.000235) - No. 00148 = 0.03847

Page No. Date Calculating butun volatility in dollars Portfolio return volatility = expected return X return volatility .2494 xo.03847 sal = $95.94 sa ~ $ 96 Answer is