Question

Portfolio Returns i. stock has mean of 8% and stdev of 20%; ii bond has mean of 6% and stdev of 15%; iii correlation b/w stock and bond of -0.3; iv. Risk free rate for cash lending and borrowing is at 1%. a. What is the mean and stdev of a portfolio of that is 60% in stock and 40% in bond (3 points)

Answer 1

Answer:

Portfolio Mean = 7.2%

Portfolio Stdev = 0.1169615 or 11.69615% rounded off to 11.70%

Explanation:

The mean return of a portfolio consisting of two securities can be calculated by multiplying the weight of each security in the portfolio by the mean return of that security and adding the products for each security. The formula for two asset or security portfolio return (mean) can be written as follows,

Portfolio Mean = wA * rA  +  wB  *  rB

Where,

• w represents the weight of each security
• r represents the mean return of each security

Portfolio Mean = 60% * 8%  +  40% * 6%

Portfolio Mean = 7.2%

The standard deviation is a measure of the total risk. The standard deviation of a portfolio consisting of two securities can be calculated using the attached formula.

Portfolio Stdev = √(0.6)² (0.2)² + (0.4)² (0.15)² + 2(0.6) (0.4) (-0.3) (0.2) (0.15)

Portfolio Stdev = 0.1169615 or 11.69615% rounded off to 11.70%