Question

P.14 An investor holding a portfolio consisting of two stocks invests 25% of assets in Stock A and 75% into Stock B. The return RA from Stock A has a mean of 4% and a standard deviation of A = 8%. Stock B has an expected return E(RB) = 8% with a standard deviation of ob = 12%. The portfolio return is P = 0.25RA +0.75RB. (a) Compute the expected return on the portfolio. (b) Compute the standard deviation of the returns on the portfolio assuming that the two stocks' returns are perfectly positively correlated. (c) Compute the standard deviation of the returns on the portfolio assuming that the two stocks' returns have a correlation of 0.5. (d) Compute the standard deviation of the returns on the portfolio assuming that the two stocks' returns are uncorrelated.

Answer 1

P0.25 RA 0.75 RA ELo.25 PAt 015 Le 0.25 E[ ot5EI Using Liaeanty of 4Expectahion ELP] + o15 x 8 expected Yebum on O25x 4 pothlio EIP 7 oP Postfolto Rehun Fixst we Vartunce Var Cp)= Var La.25)atsral P 0.25R 6.75Ra Note Vatx+) Vatx)+ VotY +2 covlx t RCoNlo.25A015) NertP.5e+ tot2 +2625j (o.75)x CovtRA Pe) Varfax)dVat fColax,by) abawlx NoolP) 121 Sudevt op Cov (RA PA=CO(Rh. Pa) (Oo) 1 vartp) P 12 Std devnp 11% Pes Peetty Postve u Com (Ra, Ra) /Coslka.Ra)- Using fowenula ) wit loviRn Pe) 0.5x8x12 48 Vartp) to3 10.15% StA devn Coy lA, Ra)-0x 812=0 Std cloe Op 9.22 (aUsing Pomela Co with

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