an investor holding a portfolio consisting of two stocks invests 25% of assets in stock A and 75%...

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an investor holding a portfolio consisting of two stocks invests 25% of assets in stock A and 75% into Stock B. The return R(A) from Stock A has a mean of 4% and a standard deviation of 8%. Stock B has an expected return E[R(B)] with a standard deviation of 12%. The portfolio return is P = 0.25R(A) + 0.75R(B)
a) compute the expected return on portfoliob) compute the standard deviation of the returns on the portfolio assuming that the two stocks returns are perfectly positively correlatedc) compute the standard deviation of the returns on the portfolio assuming that the two stocks returns have a correlation of 0.5d)compute the standard deviation of the returns on the portfolio assuming that the two stocks returns are uncorrelated

David · Accepted Answer

An investor holding a portfolio consisting of two stocks invests 25% of assets in stock A and 
75% into Stock B. The return R(A) from Stock A has a mean of 4% and a standard deviation of 
8%. Stock B has an expected return E[R(B)] with a standard deviation of 12%. The portfolio 
return is P = 0.25R(A) + 0.75R(B) 
a) Compute the expected return on portfolio 
Answer: 
Assume expected return on stock B i.e. E[R(B)] = 6% 
Expected return on portfolio: E(P) = 0.25*E(R(A)) + 0.75* E[R(B)] = 0.25*4+0.75*6 = 5.

an investor holding a portfolio consisting of two stocks invests 25% of assets in stock A and 75% into Stock B. The return R(A) from Stock A has a mean of 4% and a standard deviation of 8%. Stock B...

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