Question

Suppose Ford Motor stock has an cxpcctcd return of 20% and a volatility of 40%, and Molson Coors Brewing has an expected return of 10% and a volatility of 30%. If thc two stocks are a. What is the expected return and volatility of an equally weighted portfolio of the two b. Given your answer to part a, is investing all of your moncy in Molson Coors stock an c. Is investing all of your moncy in Ford Motor an cfficient portfolio of these two stocks? uncorrelated, stocks? efficient portfolio of these two stocks?

Answer 1

a) Expected Returns = 50% x 20% + 50% x 10% = 15%

Volatility = [(50% x 40%)^2 + (50% x 30%)^2]^(1/2) = 25%

b) No. You are getting higher returns with lower volatility by investing equally in two stocks.

c) No. You are getting higher returns per unit of volatility by investing equally in two stocks over Ford Motor stock.