Question

Stock A has an expected return of 17% and a standard deviation of 29%. Stock B has an expected return of 14% and a standard deviation of 18%. The risk-free rate is 2.8% and the correlation between Stock A and Stock B is 0.3. Build the optimal risky portfolio of Stock A and Stock B. What is the expected return on this portfolio?

Answer 1

	Where
stock A	E[R(d)]=	17.00%
Stock B	E[R(e)]=	14.00%
stock A	Stdev[R(d)]=	29.00%
Stock B	Stdev[R(e)]=	18.00%
	Var[R(d)]=	8.41%
	Var[R(e)]=	3.2%
T bil	Rf=	2.80%
Correl	Corr(Re,Rd)=	0.3
Covar	Cov(Re,Rd)=	0.0157
	Therefore W(*d)=	0.2835
	W(*e)=(1-W(*d))=	0.7165
	Expected return of risky portfolio=	14.85%

Where

Var = stddev^2                                                                                                                                                   Covariance = Correlation* Std dev (r)*Std dev (d)                                                    

Expected return of the risky portfolio = E[R(d)]*W(*e)+E[R(d)]*W(*e)