Question

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

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?

 

Solutions

Expert Solution

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%

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