A portfolio is comprised of two stocks, Stock A and Stock B Stock A has a standard deviation of 35% and comprises 40% of a portfolio. Stock B has a standard deviation of 15% and comprises 60% of a portfolio. The correlation coefficient between the returns on Stock A and Stock B is 0.45. Find the expected return, variance, and standard deviation of the portfolio. 6.2 = E(rp) = σ2
Expert Answer
The expected return on the minimum variance portfolio:-
WA =[(0.15)2-0.45(0.35)(0.15)]/[(0.15)2+(0.35)2-2(0.45)(0.15)(0.35)] = -0.01151
WB=1+0.01151=1.011551
E(rp) =(-0.01151)0.4 +1.011*0.6 =0.61
Standard deviation of the return =
SD =[(0.4)2(0.35)2+(0.6)2 (0.15)2 + 2(0.4)(0.6)(0.35)(0.15)(0.45)]0.5
S.D. =19.76%