Question

The investor decides to diversify by investing $3,000 in Gryphon stock and $5,000 in Royal stock, which Grypon stock has an expected return of 9.4% and a standard deviation of 5.24%, and which Royal stock has an expected return of 10% and a standard deviation of 13.5%. The correlation coefficient for the two stocks' returns is 0.7. Calculate the expected return and standard deviation of the portfolio.

And I calculated that the expected return of the portfolio is 9.78%, and STDEV of the portfolio is 9.91%.

My question is: Suppose the investor decides to invest an additional $3,000 in a treasury bill yielding 3.5%. What will be the expected return and standard deviation of this portfolio.

(ps. need details solutions.. )

Answer 1

	Gryphon Stock	Royal Stock
Investment	$ 3,000	$ 5,000
Investment Proportion (%)	37.5	62.5
Expected Return(%)	9.4	10
Standard Deviation(%)	5.24	13.5
Correlation	0.7

.

Calculation of Standard Deviation

	Gryphon Stock	Royal Stock	T - Bill
Investment	$ 3,000	$ 5,000	$ 3,000
Investment Proportion (%)	0.2727	0.4545	0.2727
Expected Return(%)	9.4	10	3.5
Standard Deviation(%)	5.24	13.5	0
Correlation	0.7

Calculation of Standard Deviation

The correlation between T- Bills and Other securities will be equal to Zero

The standard deviation of T - Bill = 0

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