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SHOW YOUR WORK, DO NOT USE EXCEL Consider a portfolio consisting of the following two assets:...

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Finance

SHOW YOUR WORK, DO NOT USE EXCEL

Consider a portfolio consisting of the following two assets: ?Stock A has E[RA] = 10% and ?? = 20% ? Stock B has E[RB] = 20% and?? = 40% Calculate the expected return and standard deviation ofthe portfolio under the four following sets of assumptions:

(a) wA = 1/2 and wB = 1/2 and ???= 0

(b) wA = 1/2 and wB = 1/2 and ???= -1 (c) wA = 2/3 and wB = 1/3and ??? = 0

(d) wA = 2/3 and wB = 1/3 and ??? = -1

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3.7 Ratings (478 Votes)

a

Expected return%= Wt Asset A*Return Asset A+Wt Asset B*Return Asset B
Expected return%= 0.5*0.1+0.5*0.2
Expected return%= 15
Variance =( w2A*?2(RA) + w2B*?2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*?(RA)*?(RB))
Variance =0.5^2*0.2^2+0.5^2*0.4^2+2*0.5*0.5*0.2*0.4*0
Variance 0.05
Standard deviation= (variance)^0.5
Standard deviation= 22.36%

b

Expected return%= Wt Asset A*Return Asset A+Wt Asset B*Return Asset B
Expected return%= 0.5*0.1+0.5*0.2
Expected return%= 15
Variance =( w2A*?2(RA) + w2B*?2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*?(RA)*?(RB))
Variance =0.5^2*0.2^2+0.5^2*0.4^2+2*0.5*0.5*0.2*0.4*-1
Variance 0.01
Standard deviation= (variance)^0.5
Standard deviation= 10.00%

c

Expected return%= Wt Asset A*Return Asset A+Wt Asset B*Return Asset B
Expected return%= 0.6666*0.1+0.3333*0.2
Expected return%= 13.33
Variance =( w2A*?2(RA) + w2B*?2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*?(RA)*?(RB))
Variance =0.6666^2*0.2^2+0.3333^2*0.4^2+2*0.6666*0.3333*0.2*0.4*0
Variance 0.03555
Standard deviation= (variance)^0.5
Standard deviation= 18.85%

d

Expected return%= Wt Asset A*Return Asset A+Wt Asset B*Return Asset B
Expected return%= 0.6666*0.1+0.3333*0.2
Expected return%= 13.33
Variance =( w2A*?2(RA) + w2B*?2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*?(RA)*?(RB))
Variance =0.6666^2*0.2^2+0.3333^2*0.4^2+2*0.6666*0.3333*0.2*0.4*-1
Variance 0
Standard deviation= (variance)^0.5
Standard deviation= 0.00%

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Transcribed Image Text

SHOW YOUR WORK, DO NOT USE EXCELConsider a portfolio consisting of the following two assets: ?Stock A has E[RA] = 10% and ?? = 20% ? Stock B has E[RB] = 20% and?? = 40% Calculate the expected return and standard deviation ofthe portfolio under the four following sets of assumptions:(a) wA = 1/2 and wB = 1/2 and ???= 0(b) wA = 1/2 and wB = 1/2 and ???= -1 (c) wA = 2/3 and wB = 1/3and ??? = 0(d) wA = 2/3 and wB = 1/3 and ??? = -1

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