Question

You are creating a portfolio of Stock D and Stock BW (from earlier).

You are

investing $2,000 in Stock BW and $3,000 in Stock D.

The expected return and

standard deviation of Stock D is 8% and 10.65% respectively.

The correlation

coefficient between BW and D is 0.75.What is the expected return and standard

deviation of the portfolio?

Answer 1

Assuming the ex pected return and standard deviation of stock BW is 9% and 13.15% respectively;

(i) Determining the portfolio expected return

$W_{BW}=\frac{\$2,000}{\$5,000}=0.4$

$W_D=\frac{\$3,000}{\$5,000}=0.6$

$R_P=(W_{BW})(R_{BW})+(W_D)(R_D)$

$=(0.4)(9\%)+(0.6)(8\%)$

$=8.4\%$

(ii)

Determining portfolio standard deviation

Two-asset portfolio:

determining the portfolio standard deviation

$S_p=\sqrt{0.0028+0.0025+0.0025+0.0041}$

$=\sqrt{0.0119}$

$=0.1091$