ou have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio: Tesla Eagle Expected return 13% 20% Standard Deviation of return 20% 45% Correlation of coefficient (p) 0.4 Compute the expected return of your portfolio. Also, Compute the expected risk (standard deviation) of the portfolio.
ou have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio: Tesla Eagle Expected return 13% 20% Standard Deviation of return 20% 45% Correlation of coefficient (p) 0.4 Compute the expected return of your portfolio. Also, Compute the expected risk (standard deviation) of the portfolio.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
- You have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio:
|
|
Tesla |
Eagle |
|
Expected return |
13% |
20% |
|
Standard Deviation of return |
20% |
45% |
|
Correlation of coefficient (p) |
0.4 |
Compute the expected return of your portfolio. Also, Compute the expected risk (standard deviation) of the portfolio.
Expert Solution
Step 1
Tesla return (RA) = 13%
Eagle return (RB) = 20%
Tesla weight (WA) = 500/(500+700)
= 500/1200
= 0.4167
Eagle return (WB) = 1-0.4167 = 0.5833
Therefore
Expected return of portfolio = (RA*WA)+(RB*WB)
= (0.13*0.4167)+(0.20*0.5833)
= 0.0542+0.1167
= 0.1709 or 17.09%
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