In: Accounting
You estimate that the expected return of MSFT stock is 4%, and standard deviation of MSFT stock is 9%.The expected return of AAPL stock is 3%,and standard deviation of MSFT stock is8%. If the correlation between AAP Lreturns and MSFT returns is 80%,what is the expected return and standard deviation of a portfolio with $4,000 invested in MSFT and $6,000 invested in AAPL?
Weight of MSFT = W1
= 4000/(4000+6000)
= 40%
Weight of AAPL= W2
= 6000/(4000+6000)
= 60%
Expected return = Return1*W1+ Return2*W2
= 4%*40%+3%*60%
= 3.4%
SD of portfolio = SQRT(W1^2 *SD1^2 + W2^2*SD2^2+ 2*W1*W2*SD1*SD2*CorrAB )
= SQRT(0.4^2*0.09^2+0.6^2* 0.08^2+ 2*0.4*0.6*0.09*0.08*0.8)
= SQRT(0.0063648)
= 0.07977969667
= 7.98%
Weight of MSFT = 40%
Weight of AAPL= 60%
Expected return = 3.4%
SD of portfolio = 7.98%