Question

Two-Asset Portfolio Stock A has an expected return of 12% and a standard deviation of 45%. Stock B has an expected return of 18% and a standard deviation of 65%. The correlation coefficient between Stocks A and B is 0.2. What is the expected return of a portfolio invested 40% in Stock A and 60% in Stock B

Answer 1

Answer:

Portfolio return = 0.156 or 15.6%

Explanation:

The expected return of a portfolio is the weighted average of the individual stocks returns' that form up the portfolio. For a two stock portfolio, the expected return is calculated as follows,

Portfolio return = wA * rA + wB * rB

Where,

• w is the weight of each stock
• r is the expected return of each stock

Portfolio return = 0.4 * 0.12 + 0.6 * 0.18

Portfolio return = 0.156 or 15.6%