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Portfolio Returns, Standard Deviation, and Correlation

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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% A and 65% 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% A and 65% 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 Summary

The solution is in a word document that calculates expected return and standard deviation of a portfolio that is composed of two stocks with different weights. The solution also provides a calculation of the correlation between the two stocks.

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Please see the attached word document for a better formatted solution.

a.)

Let:

E(rP) = expected return on the portfolio
E(RA) = expected return on Stock A
E(RB) = expected return on Stock B
WA = weight of Stock A in the portfolio
WB = weight of Stock B in the ...

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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