Question

Stocks A and B have the following returns:

	Stock A	Stock B
1	0.08	0.04
2	0.04	0.03
3	0.13	0.04
4	-0.03	0.03
5	0.07	-0.05

Stocks A and B have the following​ returns:

	Stock A	Stock B
1	0.080.08	0.040.04
2	0.040.04	0.030.03
3	0.130.13	0.040.04
4	negative 0.03−0.03	0.030.03
5	0.070.07	negative 0.05−0.05

a. What are the expected returns of the two​ stocks?

b. What are the standard deviations of the returns of the two​ stocks?

c. If their correlation is 0.45​, what is the expected return and standard deviation of a portfolio of 79​% stock A and 21​% stock​ B?

Answer 1

Year	Stock A	Stock B
1	8.00%	4.00%
2	4.00%	3.00%
3	13.00%	4.00%
4	-3.00%	3.00%
5	7.00%	-5.00%
a.Average=	5.80%	1.80%
b.Standard dev=	5.89%	3.83%

Where
Average or Mean = Sum of all observations/Count of all observations
Sample Standard deviation =((∑k=1 to N (observationk – average))/(N-1))^(1/2)

c

Expected return%=	Wt Stock A*Return Stock A+Wt Stock B*Return Stock B
Expected return%=	0.79*0.058+0.21*0.018
Expected return%=	4.96
Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=0.79^2*0.0589^2+0.21^2*0.0383^2+2*0.79*0.21*0.0589*0.0383*0.45
Variance	0.00257
Standard deviation=	(variance)^0.5
Standard deviation=	5.07%