Question

Big Lou’s Financial Advisors has suggested you diversify by purchasing four stocks in equal percentages because they believe this will provide better diversification. Use the table of historical returns listed below to calculate the expected return and standard deviation of the portfolio.

	Returns (%)
Year	Stock A				Stock B				Stock C				Stock D
1		14.10				18.34				9.19				8.27
2		14.86				18.66				6.91				11.46
3		9.90				13.52				8.02				4.02
4		12.17				13.51				10.09				8.60
5		10.07				13.30				7.96				4.64

a. What is the standard deviation for each stock in the portfolio? (Enter your answer as a percent rounded to two decimal places.)

Stock A %

Stock B %

Stock C %

Stock D %

b. What is the expected return for the portfolio? (Enter your answer as a percent rounded to two decimal places.)

Portfolio expect return %

c. What is the standard deviation of the portfolio? (Enter your answer as a percent rounded to two decimal places.

portfolio standard deviation %

Answer 1

Hello

(a)

Returns (%)
Year	Stock A	Stock B	Stock C	Stock D	Formula Used
1	14.10	18.34	9.19	8.27
2	14.86	18.66	6.91	11.46
3	9.90	13.52	8.02	4.02
4	12.17	13.51	10.09	8.60
5	10.07	13.30	7.96	4.64
Standard Deviation	2.26	2.77	1.23	3.07	=STDEV.S(Range of Returns)
Average Returns	12.22	15.47	8.43	7.40

(b)

(c)

Four assets			Correlations
	Exp ret	Std dev	Asset 1	Asset 2	Asset 3	Asset 4
Asset 1	0.12	0.02	1	0.92	-0.06	0.94
Asset 2	0.15	0.03	0.92	1	-0.30	0.75
Asset 3	0.08	0.01	-0.06	-0.30	1	-0.06
Asset 4	0.07	0.03	0.94	0.75	-0.06	1
Covariance matrix
0.0005	0.0006	0.0000	0.0007
0.0006	0.0008	-0.0001	0.0006
0.0000	-0.0001	0.0002	0.0000
0.0007	0.0006	0.0000	0.0009

Tangency portfolio
Weight 1	2.849
Weight 2	-0.733
Weight 3	0.259
Weight 4	-1.375
Std dev	1.71%

I hope you this clears your query.

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