Question

You are considering investing in two common stocks holding them in a two-stock portfolio. Stock A has an expected return of 10% and a standard deviation of 11.2%. Stock B has an expected return of 16% and a standard deviation of 41.1%. if you invest 34% of your portfolio in Stock A and 66% in Stock B and if the correlation between the two stocks is 0.57, what is the portfolio's expected return and standard deviation?

	A.	13.96% and 19.93%
	B.	15.21% and 22.03%
	C.	17.68% and 33.04%
	D.	13.96% and 29.46%
	E.	15.21% and 28.74%

Which of the following would be considered an example of systematic risk?

.

	A.	Apple wins its law suit against Samsung.
	B.	Quarterly profit for GM equals expectations.
	C.	Lower quarterly sales for IBM than expected.
	D.	Greater new jobless claims in the economy than expected.
	E.	The CEO at Hewlett-Packard announces his resignation

Answer 1

	Expected return	Weight	Weight 8 Expected return
A	10.00%	34%	3.4000%
B	16.00%	66%	10.5600%
		Total	13.9600%
So expected return is 13.96%
Calculation of standard deviation
The first step is to calculate the covariance:
COVAB = SDA × SDB × rAB, where rAB is the correlation coefficient between securities A and B.
Now, calculate the standard deviation for the portfolio:
[(SDA2 × WA2) + (SDB2 × WB2) + 2 (WA)(WB)(COVAB)]½
Let's calcualte the co-variance	=11.2 * 41.1 * 0.57
	262.3824
Now lets calculate the SD
SD portfolio=	((11.2^2 * 0.34^2)+(41.1^2*0.66^2)+(2*0.34*0.66*262.3824))^(0.5)
SD portfolio=	29.46

So option D is correct.

Systemic risk are those which are not company specific but universe specific. Here in our case option D i.e. greater new jobless claims in the economy than expected will be considered as systemic risk.