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Portfolio risk and return

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1. Suppose a portfolio had been formed with 40% portfolio value in stock DO and 60% in stock GDT. Compute the mean and standard deviation of the individual stock returns, and S&P 500 index returns over the sample period. Is the portfolio's return riskier than the individual stock returns, than the index returns?
2. Calculate the correlation coefficient between stock DO and stock GDT's returns?
3. Using regression analysis, estimate the beta of each of stock and portfolio relative to the S&P500 index. Interpret the betas. What is the relationship between portfolio's betas and its component stocks betas?
4. If the risk free rate is 5% next year, and analysts expect that S&P500 index return will be 10% what will be the expected returns od stock DO, stock GDT and the portfolio? Apply CAPM model.

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Solution Summary

Calculates mean return, standard deviation of return of stocks, the correlation between the returns of stocks, beta of stocks and the expected return of stocks (using CAPM).

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