Question
In: Finance
Jack has a portfolio with two stocks ABC and XYZ with the following parameters:
Jack has a portfolio with two stocks ABC and XYZ with the following parameters: $ Invested Expected Return Standard Deviation of Return ABC $4000 4.45% 8.23% XYZ $6000 7.96% 9.76% The correlation coefficient between ABC and XYZ is 0.40.
A. Compute expected return of the portfolio.
B. Calculate covariance of ABC and XYZ stock.
C. Compute the standard deviation of the portfolio.
Solutions
Expert Solution
Weight of ABC = 4,000/(4,000 + 6,000) = 40.00%
Weight of XYZ = 60.00%
Expected Return = 0.40(0.0445) + 0.60(0.0796)
Expected Return = 6.56%
Covariance = Correlation(Standev of ABC)(Standev of XYZ)
Covariance = 0.40(0.0823)(0.0976)
Covariance = 0.003213
Standard Deviation = [(0.40)2(0.0823)2 + (0.60)2(0.0976)2 + 2(0.40)(0.60)(0.003213)]1/2
Standard Deviation = 7.78%
jeff jeffy answered 2 years agoRelated Solutions
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