Question

Analyzing portfolio risk and return involve the understanding of expected returns from a portfolio. Consider the following case: Andre is an amateur investor who holds a small portfolio consisting of only four stocks.The stock holdings in his portfolio are shown in the following table: Artemis (20% of portfolio, 6.00% expected return, 34.00% standard deviation) Babish & Co. (30% of portfolio, 14.00% expected return, 38.00% standard deviation) Cornell Industries (35% of portfolio, 12.00% expected return, 41.00 standard deviation) Danforth Motors (15% of portfolio, 3.00% expected return, 43.00% standard deviation) What is the expected return of Andre's stock portfolio? a. 15.08, b. 13.57, c. 10.05 d. 7.54 Suppose each stock in the preceding portfolio has a correlation coefficient of 0.4 (p=0.4) with each of the other stocks. If the weighted average of the risk (standard deviation) of the individual securities in the partially diversified portfolio of four stocks is 39%, the portfolio's standard deviation most likely is ________ 39%. a. equal to, b. more than, c. less than

Answer 1

c. 10.05

less than 39%

Explanation:

an expected return is defined as the profit or loss an investor may earn based on the given rates of return.

to calculate the expected rate of return, we multiply each of the stock's weight by its expected return value. Thus we have;

0.06×0.2 + 0.3×0.14 + 0.35×0.12 + 0.15×0.03 = 0.012+0.042+0.042+0.0045

= 0.1005

multiply the above result by 100% we have 10.05

since the correlation coefficient is 0.4 which is less than 1, then the correlation is not perfectly distributed thus the standard deviation is most likely to be less than 39%.