Question

In: Finance

Given: E(R1) = 0.11 E(R2) = 0.17 E(σ1) = 0.01 E(σ2) = 0.04 Calculate the expected...

Given:

E(R1) = 0.11
E(R2) = 0.17
E(σ1) = 0.01
E(σ2) = 0.04

Calculate the expected returns and expected standard deviations of a two-stock portfolio in which Stock 1 has a weight of 70 percent under the conditions given below. Do not round intermediate calculations. Round your answers for the expected returns of a two-stock portfolio to three decimal places and answers for expected standard deviations of a two-stock portfolio to four decimal places.

  1. r1,2 = 1.00

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  2. r1,2 = 0.65

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  3. r1,2 = 0.30

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  4. r1,2 = 0.00

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  5. r1,2 = -0.30

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  6. r1,2 = -0.65

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

  7. r1,2 = -1.00

    Expected return of a two-stock portfolio:

    Expected standard deviation of a two-stock portfolio:

Solutions

Expert Solution

Expected return=weight in A*return of A+weight in B*return of B
Standard deviation=sqrt((weight of A*standard deviation of A)^2+(weight of B*standard deviation of B)^2+2*weight of A*standard deviation of A*weight of B*standard deviation of B*correlation)

1.
=0.7*0.11+0.3*0.17=0.128

2.
=sqrt((0.7*0.01)^2+(0.3*0.04)^2+2*0.7*0.01*0.3*0.04*1)=0.019000

3.
=0.7*0.11+0.3*0.17=0.128
4.
=sqrt((0.7*0.01)^2+(0.3*0.04)^2+2*0.7*0.01*0.3*0.04*0.65)=0.017384

5.
=0.7*0.11+0.3*0.17=0.128

6.
=sqrt((0.7*0.01)^2+(0.3*0.04)^2+2*0.7*0.01*0.3*0.04*0.30)=0.015601

7.
=0.7*0.11+0.3*0.17=0.128

8.
=sqrt((0.7*0.01)^2+(0.3*0.04)^2+2*0.7*0.01*0.3*0.04*0)=0.013892

9.
=0.7*0.11+0.3*0.17=0.128

10.
=sqrt((0.7*0.01)^2+(0.3*0.04)^2+2*0.7*0.01*0.3*0.04*(-0.30))=0.011942

11.
=0.7*0.11+0.3*0.17=0.128

12.
=sqrt((0.7*0.01)^2+(0.3*0.04)^2+2*0.7*0.01*0.3*0.04*(-0.65))=0.009154

13.
=0.7*0.11+0.3*0.17=0.128

14.
=sqrt((0.7*0.01)^2+(0.3*0.04)^2+2*0.7*0.01*0.3*0.04*(-1))=0.005000

jeff jeffy answered 1 month ago
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