Purchase Solution

Standard deviations of stocks

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution
Solution Summary

Standard deviations of stocks are emphasized.

Solution Preview

Hello!
Here are your answers.

a. The expected return of a two-stock portfolio, where 'wa' is the weight of stock A (in this case 0.35) and 'wb' is the weight of stock B (in this case 0.65) is:

Exp Ret of Portfolio = wa*E(RA) + wb*E(RB) = 0.35*0.17 + 0.65*0.27 = 0.235

So the expected return is 0.235, or 23.5%

The Variance of a two-stock portfolio (the standard deviation will simply be the square root of the variance) is:

Variance = (wa^2)*Variance(A) + (wb^2)*Variance(B) + 2*wa*wb*Covariance(A, B)
[the symbol ^ means "to the power of "]

So we first find the variance ...

Purchase this Solution
Free BrainMass Quizzes
Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Motivation

This tests some key elements of major motivation theories.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

View More Free Quizzes
Related BrainMass Solutions

  • Financial Question: Stock Return

    Following this pattern, 2 standard deviations up would be 13%+20.2%+20.2%=53.4% In the same manner, 2 standard deviations down would be 13%-20.2%-20.2%= -27.4% From this, we have established a range of a low of -27.4% to a high of 53.4%.

  • Return and Risk of small-company stocks

    Calculate the average returns on small-company stocks and u.s. treasury bills. b. calculate the variances and standard deviations of the returns on small-company stocks and u.s. treasury bills. c. compare the returns and risks of these two types of securities

  • Expected Returns and Standard Deviations for Two Stocks

    149940 Expected returns and standard deviations for two stocks Two Stocks, X and Y, have three states of nature based on the state of the economy: State of Economy Probability Stock X Return Stock Y Return Recession

  • Problems in CAPM / Beta / Return and standard deviations

    c. 1.2 Solve Problems 10.6 on page 289, RWJ Chapter 10 Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.15, E(RB) = 0.25, A 0.1 and B = 0.2 respectively. a.

  • Risk aversion and Utility function

    standard deviations of returns for two stocks and the risk aversion and utility function for an investor, the solution determines which stock is attractive.

  • tocks

    222652 Expected returns and standard deviations for stocks Consider two stocks, A and B, with the following expected returns and standard deviations.

  • Important information about Expected Return/Standard Deviation

    Calculate the standard deviation of returns on each stock. c. Calculate the covariance and correlation between the returns of the two stocks. Suppose you have invested in only two stocks, Y and Z.

  • The coefficient of variation is a better measure of risk tha

    The coefficient of variation is a better measure of risk than the standard deviation if the expected returns of the securities being compared differ significantly. a.

  • Expected return, Standard Deviation, CAPM

    60487 Expected returns and standard deviations 1. Suppose the expected returns and standard deviations of stocks A and B are E (RA) = 0.15, E (RB) = 0.25, sA = 0.1, and sB = 0.2, respectively.

View More Related Solutions