Question

please assist with excel function or calculator

QUESTION 54 Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have return of 15%, betas of 1.6, and standard deviations of 30%-The returns ofthe two stocks are independent correlation coefficient between them, xy, is zero. Which of the following statements best describes the cl your 2-stock portfolio? Your portfolio has a beta greater than 1.6, and its expected return is greater than 15% Your portfolio has a beta equal to 1.6, and its expected return is 15% Your portfolio has a standard deviation greater than 30% and a beta equal to 1.6. Your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6 Your portfolio has a standard deviation of 30%, and its expected return is 15%.

Answer 1

Answer: Option B is the answer.

If we have to calculate the standard deviation of the portfolio formula would be

Wx = weight of stock x =0.5

Wy = weight of stock Y = 0.5

SDx = Standard deviation of stock X

SDy = Standard Deviation of stock Y

SD of portfolio = Square root ((wx*SDx )^2 + (Wy*SDy)^2 + 2*Wx* SDx*Wy*SDy*Correlation coefficient)

if correlation coefficient is 1 then standard deviation will be weighted average

if correlation coefficient is 0 then standard deviation will be less then weighted average which is the case here

Expected return of portfolio = Wx * return X + Wy * return Y

Expected return of portfolio = 0.5* 15% +0.5*15%

Expected return = 15%

Beta of a portfolio is similarly calculated and will be 1.6 for portfolio.

Beta =1.6 and expected return = 15%

Standard deviation will be less than 30%

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