Question

Suppose the expected returns and standard deviations of Stocks A and Bare E(RA) 100, E(Ra) 160, OA370, and OB 630 a-1. Calculate the expected return of a portfolio that is composed of 45 percent A and 55 percent Bwhen the correlation between the returns on A and Bis .60. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g, 32.16.) % Expected return a-2. Calculate the standard deviation of a portfolio that is composed of 45 percent A and 55 percent Bwhen the correlation coefficient between the returns on A and Bis 60. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) % Standard deviation b. Calculate the standard deviation of a portfolio with the same portfolio weights as in part (a) when the correlation coefficient between the returns on A and Bis-60. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Standard deviation

please make sure all answers are rounded to 2 decimal points. thanks!

Answer 1

Answer a-1:

Expected return = Weight of A * Expected return of A + Weight of A * Expected return of A

= 45% * 0.100 + 55% * 0.160

= 13.30%

13.30 % Expected Return

Answer a-2:

Standard deviation = SQRT (Variance)

Formula for variance of a portfolio of stock A and stock B is:

Variance = 45%² * 0.370² + 55%² * 0.630² + 2 * 45% * 55% * 0.60 * 0.370 * 0.630

= 21.70152%

Standard Deviation = SQRT (21.70152%) = 46.58%

Standard Deviation 46.58

Answer b:

Variance = 45%² * 0.370² + 55%² * 0.630² + 2 * 45% * 55% * - 0.60 * 0.370 * 0.630

= 7.85538%

Standard deviation = SQRT (7.85538%) = 28.03%

Standard Deviation 28.03