The expected return on MSFT next year is 12% with a standard deviation of 20%. The expected 4) return on AAPL next year is 24% w

Question

OverLord2011 [107]

3 years ago

11

The expected return on MSFT next year is 12% with a standard deviation of 20%. The expected 4) return on AAPL next year is 24% w

ith a standard deviation of 30%. The correlation between the two stocks is .6. If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio?

Business

1 answer:

Sedaia [141] · Answer 1 · 2022-09-05T23:17:37+03:00

Answer:

Expected return of MSFT (ERMSFT) = 12%

Expected return of AAPL (ERAAPL) = 24%

Weight of MSFT (WMSFT) = 50% = 0.5

Weight of AAPL (WAAPL) = 50% = 0.5

ER(P) = ERMSFT(WMSFT) + ERAAPL(WAAPL)

ER(P) = 12(0.5) + 24(0.5)

ER(P) = 6 + 12

ER(P) = 18%

Explanation:

The expected return on the portfolio is expected return on MSFT multiplied by weight of MSFT plus the expected return on AAPL multiplied by weight of AAPL. Weight is the percentage of funds invested in each security, which is 50% (equal weight).