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    Portfolio Return and Standard Deviation

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    Ross chapter 10, Question 10.6 Modified

    10.6 Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.17, E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively.

    a. Calculate the expected return and standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.

    b. Calculate the standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation coefficient between the returns on A and B is -0.6.

    c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?

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    Solution Preview

    Suppose the expected returns and standard deviations of stocks A and B are E (RA) = 0.17, E (RB) = 0.27, sA = 0.12, and sB = 0.21, respectively.

    1. Calculate the expected return and standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.

    The expected returns can be calculated by using the portfolio weights. ...

    Solution Summary

    The solution explains how to calculate the expected return and standard deviation of returns for a portfolio

    $2.19

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