Question

Chris Smith owns a portfolio consisting of two stocks, Amazon and Apple, Inc. Chris owns $2,000 of Amazon and $6,500 of Apple, Inc. Chris has computed the expected return on Amanzon to be 8.2% and the expected return on Apple, Inc. to be 9.5%. The standard deviation of the returns on Amazon is 5.07% and the standard deviation of the returns on Apple, Inc. is 6.84%. The covariance on the returns of the two companies is -0.0014.

1. What is the expected return on Chris’ portfolio?

a. 6.39 percent
b. 7.70 percent
c. 9.99 percent
d. 7.89 percent
e. 9.19 percent

2. . What is the risk of this portfolio (measured by standard deviation)?

a. 4.87 percent
b. 4.26 percent
c. 2.73 percent
d. 7.46 percent
e. 3.82 percent

Answer 1

0.0919411

4.87%

Step-by-step explanation:

Given that:

AMAZON :

Investment = $2000

Expected return = 8.2%

Standard deviation = 5.07%

APPLE :

Investment = $6500

Expected return = 9.5%

Standard deviation = 6.84%

Total investment = $(2000 + 6500) = $8500

Amazon investment weight :

2000 / 8500 = 0.2353

Apple investment weight :

6500 / 8500 = 0.7647

Expected return on portfolio:

(Amazon weight * Amazon expected return) + (apple weight * apple expected return)

= (0.2353 * 0.082) + (0.7647 * 0.095)

= 0.0919411

= 0.0919411 * 100%

= 9.19411 = 9.19%

Portfolio risk :

Sqrt[(Amazon weight ² * amazon standard deviation²) + (apple weight ² * apple standard deviation ²) + 2 (weight of Amazon * weight of apple * covariance)]

Sqrt[(0.2353^2 * 0.0507^2) + (0.7647^2 * 0.0684^2) + 2(0.2353 * 0.7647 * - 0.0014)

Sqrt(0.0023743662707145)

= 0.0487274

= 0.0487274 * 100%

= 4.87%