In: Finance
Price Today, A |
Price Today, B | State Tomorrow | Probability | Price Tomorrow, A | Price Tomorrow, B |
30 | 20 | Good | 0.5 | 60 | 40 |
Bad | 0.5 | 15 | 5 |
1a). Given the following information, calculate the correlation coefficient between the returns on
stocks A and B
a. 0
b. 0.25
c. 0.5
d. 0.75
e. 1
1b). Calculate expected return and standard deviation of the portfolio that is allocated 40% to A, 60% to B.
Correlation coefficient between the returns on stock A and stock B is calculated in excel and screen shot provided below:
Correlation coefficient between the returns on stock A and stock B is 1.
Option (E) is correct answer.
1(b)
Expected return and standard deviation of stock A is calculated in excel and screen shot provided below:
Expected return of stock A is 25% and standard deviation is 75%.
Expected return and standard deviation of stock B is calculated in excel and screen shot provided below:
Expected return of stock B is 12.50% and standard deviation is 87.50%.
Expected return of portfolio = (40% × 25%) + (60% × 12.50%)
= 10% + 7.50%
= 17.50%
Expected return of portfolio is 17.50%.