Question

eBook Problem 6-06 Given: E(R1) = 0.12 E(R2) = 0.16 E(σ1) = 0.05 E(σ2) = 0.06 Calculate the expected returns and expected standard deviations of a two-stock portfolio having a correlation coefficient of 0.75 under the conditions given below. Do not round intermediate calculations. Round your answers to four decimal places. w1 = 1.00 Expected return of a two-stock portfolio: Expected standard deviation of a two-stock portfolio: w1 = 0.70 Expected return of a two-stock portfolio: Expected standard deviation of a two-stock portfolio: w1 = 0.55 Expected return of a two-stock portfolio: Expected standard deviation of a two-stock portfolio: w1 = 0.20 Expected return of a two-stock portfolio: Expected standard deviation of a two-stock portfolio: w1 = 0.10 Expected return of a two-stock portfolio: Expected standard deviation of a two-stock portfolio: Choose the correct risk–return graph for weights from parts (a) through (e) when ri,j = -0.75; 0.00; 0.75. The correct graph is -Select-graph Agraph Bgraph Cgraph DItem 11 . A. B. C. D.

Answer 1

Expected return of two-asset portfolio R_p = w₁R₁ + w₂R_2,

where R_p = expected return

w₁ = weight of Asset 1

R₁ = expected return of Asset 1

w₂ = weight of Asset 2

R₂ = expected return of Asset 2

Expected standard deviation for a two-asset portfolio σ_p = (w₁²σ₁² + w₂²σ₂² + 2w₁w₂Cov_1,2)^1/2

where σ_p = standard deviation of the portfolio

w₁ = weight of Asset 1

w₂ = weight of Asset 2

σ₁ = standard deviation of Asset 1

σ₂ = standard deviation of Asset 2

Cov_1,2 = covariance of returns between Asset 1 and Asset 2

Cov_1,2 = ρ_1,2 * σ₁ * σ_2, where ρ_1,2 = correlation of returns between Asset 1 and Asset 2

The expected returns and expected standard deviations are calculated below for each portfolio :