Answer to Question #190064 in Finance for jafar suleiman

Question #190064

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?



1
Expert's answer
2021-05-07T09:54:45-0400

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"




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