In: Finance
Stocks A and B have the following returns:
Stock A |
Stock B |
||
1 |
0.110.11 |
0.050.05 |
|
2 |
0.070.07 |
0.030.03 |
|
3 |
0.140.14 |
0.030.03 |
|
4 |
negative 0.02−0.02 |
0.010.01 |
|
5 |
0.080.08 |
negative 0.04−0.04 |
a. What are the expected returns of the two stocks?
b. What are the standard deviations of the returns of the two stocks?
c. If their correlation is
0.44
what is the expected return and standard deviation of a portfolio of
78%
stock A and
22%
stock B?
Answer 1 & 2
X | Y | |
Mean | 0.076 | 0.016 |
SD | 0.05389 | 0.03072 |
Answer 3 = Expected Return = 0.0628 and Portfolio SD = 0.0423
Where Wa = = Weight of stock a ; Wb = Weight of STock B,
Ra = Return from Stock a and Rb = Return from Stock B
where Wa = Weight of stock a ; Wb = Weight of STock B; SDa = Standard deviation of stock A; SDb = Standard deviation of stock B; r = Correlation COefficient between a & b
Results are
For Portfolio SD and Portfolio Return
Result