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Compute the expected return of the portfolio

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An investor holding a certain portfolio consisting of two stocks invests 40% in Stock A and 60% in Stock B. The expected return from Stock A is 4% and that from Stock B is 12%. The standard deviations are 8% and 10% for Stocks A and B respectively.

a) Compute the expected return of the portfolio.

b) Compute the standard deviation of the portfolio assuming the correlation between the two stocks is 0.75.

c) Compute the standard deviation of the portfolio assuming the correlation between the two stocks is 1.

d) Compare your answers in (b) and (c). What do you observe and why? (5 points)

  • E(aX + bY) = aE(X) + bE(Y), where E means expected value
  • Var(aX + bY) = a2Var(X) + b2Var(Y) + 2abCov(XY), where Var means variance and Cov
  • means covariance
  • Corr(XY) = 

Reference no: EM132240894

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