Accounting: Calculating the expected return and standard deviation of a portfolio.
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Suppose the expected returns and standard deviations of stocks A and B are E(Ra) =0.15, E(Rb) = 0.25, Stdev A = 0.1, and Stdev B = 0.2, respectively. Calculate the expected return and standard deviation of a portfolio that is composed of 40% A and 60% B when the correlation between the returns on A and B is 0.5.
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Solution Summary
This solution calculates the expected return and standard deviation of a portfolio of two stocks.
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Formulas to use:
Expected return = x * E(A) + y * E(B), where x and y are the weights assigned to stocks A and B respectively
Variance (x * A + y * B) = x^2 * variance (A) + y^2 * variance (B) + 2 * x * y * covariance (A, B)
Covariance ...
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