Answer:
In order to find expected portfolio return we multiply the weight of each security by its expected return and then add all the values.
Artemis = 0.2*0.06=0.012= 1.2%
Babish= 0.3*0.14=0.042= 4.2%
Cornell = 0.35*0.12= 0.042= 4.2%
Danforth Motors = 0.15*0.03=0.0045= 0.45%
1.2+4.2 + 4.2 +0.45=10.05%
Then in order to find the portfolio variance the formula is
Variance = (w(1)^2 * SD(1)^2) + (w(2)^2 * SD(2)^2) + (2 * (w(1)*(1)*w(2)*o(2)*q(1,2)))
and we can under root this to find the standard deviation
Variance = (w(1)^2 * SD(1)^2) + (w(2)^2 * SD(2)^2) + (2 * (w(1)*SD(1)*w(2)*SD(2)*CR(1,2)))
W (1): Weight of one stock in the portfolio squared.
SD (1): The standard deviation of one asset in the portfolio squared.
W (2): Weight of second stock in the portfolio squared.
O (2): The standard deviation of the second asset in the portfolio squared.
CR(1,2): The correlation between the two assets in the portfolio has been denoted as q (1,2).
When we use this formula whenever the co relation is less than 1 the portfolio standard deviation is less than the weighted average standard deviation of all the individual stocks.
So in this case as the co relation is less than 1 portfolios standard deviation is less than 39%
Explanation:
