Question

Richard must decide how to allocate the capital in his portfolio.
Richard has		$2,000	available to invest. He finds the rates of
return for four stocks for the past 12 years and the results are given
below. Richard plans to invest 25% of his funds in each stock.
a) How much will he invest in each stock?							Enter Answer
(1 Mark)
b) The expected return of Richard's porfolio is:							Enter Answer		%
(Round your answer to one one-hundreth of a percent)
c) The standard deviation of Richard's portfolio return is:							Enter Answer		%
(1 Mark)(Round your answer to one one-hundredth of a percent)
							↑
Year	Stock A (%)	Stock B (%)	Stock C (%)	Stock D (%)			Enter your Final Answer Here
1	0.000	0.000	0.000	0.000
2	14.000	3.500	-3.500	21.000
3	24.000	6.000	-6.000	36.000
4	12.000	3.000	-3.000	18.000
5	-36.000	-9.000	9.000	-54.000
6	44.000	11.000	-11.000	66.000
7	0.000	0.000	0.000	0.000
8	26.000	6.500	-6.500	39.000
9	6.000	1.500	-1.500	9.000
10	16.000	4.000	-4.000	24.000
11	-10.000	-2.500	2.500	-15.000		Complete your rough work in the space below
12	-20.000	-5.000	5.000	-30.000

Answer 1

a). Amount invested by Richard in each of four stocks = 2000 * 0.25

= $ 500.

Conclusion :- Richard will invest $ 500 in each of the four stock.

b). Expected return of portfolio of Richard in Year 1 :-

= Weight of Stock A * Return of Stock A + Weight of Stock B * Return of Stock B + Weight of Stock C * Return of Stock C + Weight of Stock D * Return of Stock D

= 0.25 * 0 + 0.25 * 0 + 0.25 * 0 + 0.25 * 0

= 0 %

Expected return of portfolio of Richard in Year 2 :-

= Weight of Stock A * Return of Stock A + Weight of Stock B * Return of Stock B + Weight of Stock C * Return of Stock C + Weight of Stock D * Return of Stock D

= 0.25 * 14 + 0.25 * 3.50 + 0.25 * (-) 3.50 + 0.25 * 21

= 3.50 + 0.875 + (-) 0.875 + 5.25

= 8.75 %

Expected return of portfolio of Richard in Year 3 :-

= Weight of Stock A * Return of Stock A + Weight of Stock B * Return of Stock B + Weight of Stock C * Return of Stock C + Weight of Stock D * Return of Stock D

= 0.25 * 24 + 0.25 * 6 + 0.25 * (-) 6 + 0.25 * 36

= 6 + 1.50 + (-) 1.50 + 9

= 15 %

Similarly, Expected return of portfolio of Richard for the next 9 years (Year 4 to Year 12) can be calculated..