Question

In: Finance

A portfolio consists of 60% of Security A (expected return of 0.10 and standard deviation of...

A portfolio consists of 60% of Security A (expected return of 0.10 and standard deviation of 0.03) and 40% of Security B (expected return of 0.20 and standard deviation of 0.05) and the correlation coefficient between A and B is -0.0012.

a) Calculate the expected return and standard deviation of the portfolio.

b) Calculate the standard deviation of the portfolio if there was no diversification benefit.

Solutions

Expert Solution

Part A:

Expected Ret :

Portfolio Return is the weighted avg return of securities in that portfolio.

Stock Weight Ret WTd Ret
Security A 0.6000 10.00% 6.00%
Security B 0.4000 20.00% 8.00%
Portfolio Ret Return 14.00%

Portfolio SD:

Particulars Amount
Weight in A 0.6000
Weight in B 0.4000
SD of A 3.00%
SD of B 5.00%
r(A,B) -0.0012

Portfolio SD = SQRT[((Wa*SDa)^2)+((Wb*SDb)^2)+2*(wa*SDa)*(Wb*SDb)*r(A,B)]
=SQRT[((0.6*0.03)^2)+((0.4*0.05)^2)+2*(0.6*0.03)*(0.4*0.05)*-0.0012]
=SQRT[((0.018)^2)+((0.02)^2)+2*(0.018)*(0.02)*-0.0012]
=SQRT[0.0007]
= 0.0269
= I.e 2.69 %

Part B:

Particulars Amount
Weight in A 0.6000
Weight in B 0.4000
SD of A 3.00%
SD of B 5.00%
r(A,B) 1

Portfolio SD = SQRT[((Wa*SDa)^2)+((Wb*SDb)^2)+2*(wa*SDa)*(Wb*SDb)*r(A,B)]
=SQRT[((0.6*0.03)^2)+((0.4*0.05)^2)+2*(0.6*0.03)*(0.4*0.05)*1]
=SQRT[((0.018)^2)+((0.02)^2)+2*(0.018)*(0.02)*1]
=SQRT[0.0014]
= 0.038
= I.e 3.8 %


Related Solutions

You are to examine the expected return and risk (standard deviation) of a two security portfolio....
You are to examine the expected return and risk (standard deviation) of a two security portfolio. Your portfolio consists of the stock of Wolf Creek Company (WCC) and the stock of RHC Industrial. The two companies’ stocks have the following stock prices over the past 10 years, and they do not pay dividends. WCC ($)                                   RHC ($) 2006                                                    45                                            18 2007                                                    49                                            19 2008                                                    44                                            21 2009                                                    58                                            25 2010                                                    55                                            27 2011                                                    46                                            25 2012                                                    68                                           ...
Calculate the expected return and standard deviation of the portfolio.
A portfolio consists of two stocks:   Stock                 Expected Return            Standard Deviation             Weight   Stock 1                          10%                                     15%                            0.30 Stock 2                          13%                                     20%                            ???   The correlation between the two stocks’ return is 0.50   Calculate the expected return and standard deviation of the portfolio. Expected Return: Standard Deviation: (i) Briefly explain, in general, when there would be “benefits of diversification” (for any       portfolio of two securities).               (ii) Describe whether the above portfolio would...
Weight of Security A Weight of Security B Portfolio Return Portfolio Standard Deviation 0% 100% 12...
Weight of Security A Weight of Security B Portfolio Return Portfolio Standard Deviation 0% 100% 12 225.0 20% 80% 10.4 121.0 40% 60% 8.8 49.0 60% 40% 7.2 9.0 80% 20% 5.6 1.0 100% 0% 4.0 25.0 How can you choose the right combination (i.e.,, the weights on A and B) to create a risk-free portfolio? Based on the result in part , could the equilibrium rf be greater than 6%? Explain.
You have a portfolio with a standard deviation of 25 % and an expected return of...
You have a portfolio with a standard deviation of 25 % and an expected return of 15 %. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 20 % of your money in the new stock and 80 % of your money in your existing​ portfolio, which one should you​ add? Expected Return Standard Deviation Correlation with Your​ Portfolio's Returns Stock A 15​% 23​% 0.4 Stock B 15​%...
You have a portfolio with a standard deviation of 22 % and an expected return of...
You have a portfolio with a standard deviation of 22 % and an expected return of 16 %. You are considering adding one of the two shares in the table below. If after adding the shares you will have 20 % of your money in the new shares and 80 % of your money in your existing​ portfolio, which one should you​ add? Expected return Standard deviation Correlation with your​ portfolio's returns Share A 13​% 26​% 0.4 Share B 13​%...
You have a portfolio with a standard deviation of 30 % and an expected return of...
You have a portfolio with a standard deviation of 30 % and an expected return of 18 %. You are considering adding one of the two stocks in the following table. If after adding the stock you will have 30 % of your money in the new stock and 70 % of your money in your existing​ portfolio, which one should you​ add? Expected Return Standard Deviation Correlation with Your Portfolio's Returns Stock A 15% 23% 0.3 Stock B 15%...
The expected return of market portfolio is 10%. The standard deviation of market portfolio is 20%....
The expected return of market portfolio is 10%. The standard deviation of market portfolio is 20%. Risk free interest rate is 2%. There is an investor with mean-variance utility function  Answer the following questions. 1) Calculate the optimal weight to be invested in the market portfolio for the investor with A=5 . Calculate the expected return and standard deviation of the optimal complete portfolio for the investor. 2) According to the CAPM, calculate the expected returns of two stocks (stock 1...
Security X has expected return of 14% and standard deviation of 22%. Security Y has expected...
Security X has expected return of 14% and standard deviation of 22%. Security Y has expected return of 16% and standard deviation of 28%. The two securities have a correlation coefficient of -1. You wish to combine the two securities in order to construct a portfolio that has a standard deviation of zero. Which percentage of your capital should you invest in security X? (Enter your answer as a percent)
10. Security A has an expected rate of return of 10% and a standard deviation of...
10. Security A has an expected rate of return of 10% and a standard deviation of 16%. Security B has an expected rate of return of 8% and a standard deviation of 12%. Let A and B are perfectly negatively correlated. The expected return of a risk-free portfolio formed with A and B is Select one: a. 10% b. 9.47% c. 7.86% d. 8.86%
Assume a security has an expected return of .12 and a standard deviation of 0.08 a)...
Assume a security has an expected return of .12 and a standard deviation of 0.08 a) What is the expected return two standard deviation above the mean and what is the probability of a return greater that this amount? B) What is the probability of a return greater than 0.04 for a given year.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT