Question
In: Finance
A stock (S) has an expected return of 15% and standard deviation of 5%. A bond...
A stock (S) has an expected return of 15% and standard deviation of 5%. A bond (B) has an expected return of 10% and standard deviation of 2%. Correlation coefficient between S and B is 0.2. An investor wants to allocate 25% of her portfolio to S and the remainder of her portfolio to B. What is the expected return and variance of this portfolio?
Solutions
Expert Solution
Calculation of Expected Return of Portfolio :
Expected Return = Sum of (Weight * Return )
= [15 * 0.25] + [10 * (1 - 0.25)]
= 11.25%
Variance of Portfolio = [(Standard deviation of S)^2 * (Weight of S)^2] + [(Standard deviation of B)^2 * (Weight of B)^2] + [2 * Correlation Coefficient * Standard deviation of S * Standard deviation of B * Weight of S* Weight of B]
= [(5)^2 * (0.25)^2] + [(2)^2 * (0.75)^2] + [2 * 0.2 * 5 * 2 * 0.25 * 0.75 ]
= [1.5625 + 2.25 + 0.75]
= 4.5625
jeff jeffy answered 2 years agoRelated Solutions
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of 15%. The riskfree rate is 5%. A risk-averse investor would
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calculate expected return and standard deviation of a portfolio
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Expected Return Standard Deviation Stock fund (S) 20%  
Expected Return Standard Deviation
Stock fund (S)
20%
30%
Bond fund (B)
12%
15%
Correlation = .10
7. If you were to use only the two risky funds, and still
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conclude?
Problem 9
Stock Expected Return
Standard Deviation
A
10%
5%
B...
Given the following information: Expected return on Stock A .15 (15%) Standard deviation of return 0.3...
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.15 (15%)
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0.3
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Standard deviation of return
0.4
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on Stock A and Stock B
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