Chapter 11, Problem 28QAP

a

Summary Introduction

Adequate information:

Expected return for Stock A $\left({\text{ER}}_{\text{A}}\right)$ = 0.11

Expected return for Stock B $\left({\text{ER}}_{\text{B}}\right)$ = 0.13

Standard deviation of Stock A $\left({\sigma }_{\text{A}}\right)$ = 0.47

Standard deviation of Stock B $\left({\sigma }_{\text{B}}\right)$ = 0.81

Weight of Stock A $\left({\text{W}}_{\text{A}}\right)$ = 0.40

Weight of Stock B $\left({\text{W}}_{\text{B}}\right)$ = 0.60

Correlation between Stock A and B $\left({\text{ρ}}_{\text{A,B}}\right)$ = 0.5

To compute: Expected return on the portfolio.

Introduction: Expected return on the portfolio refers to the return expected on the investment portfolio.

b

Summary Introduction

Adequate information:

Correlation between Stock A and B $\left({\text{ρ}}_{\text{A,B}}\right)$ = -0.5

To compute: Standard deviation of the portfolio.

Introduction: Standard deviation of the portfolio refers to the deviation of the actual returns from the expected returns.

c

Summary Introduction

To compute: Effect of correlation between Stock A and B on the standard deviation of the portfolio.

Introduction: Correlation refers to the degree of fluctuation of two variables in relation to one another.