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 ago
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