Question

You have invested a portfolio comprised of Dell, Apple and Microsoft. Calculate the expected return and standard deviation of the portfolio given the information below. (SHOW IN EXCEL). Provide step by step solution.

1)Calculate the Expected return of the portfolio. (EXCEL)

2) The variance of the portfolio (EXCEL)

3) The standard deviation of the portfolio ( EXCEL)

Money spent Dell	$1680
Money spent Apple	$1805
Money spent Microsoft	$1584
Expected Return Dell	41%
expected return Apple	23%
expected return Microsoft	20%
standard deviation dell	14%
standard deviation apple	15%
standard deviation Microsoft	11%
correlation coefficient dell and apple	0.22
correlation coefficient dell and Microsoft	0.42
correlation coefficient Apple and Microsoft	0.25

  

Answer 1

1) Expected return

First find the total investment by adding the money spent on all 3 stocks. Now find the weightage of investment in each stock. Multiply the weightage of each stock with its respective expected return. Add the total of ER*W of all 3 stocks to arrive at the Expected return of the portfolio.

2) Variance of portfolio

For a 3 asset portfolio, the variance of portfolio can be found using the formula given in the computation. For the purpose of computation find the square of weights and Standard deviation of the stocks. then apply formula. Since the correlation coefficient is given, we are computing the variance using that.( If in a problem, the covariance is given, then computation can be done accordingly. Covariance is nothing but correlation coefficient between two stocks x SD of stock 1 x SD of stock 2)

3) Standard Deviation of portfolio

Standard deviation is square root of variance. Hence we use the SQRT function in excel to find the same.