You hold a portfolio consisting of two stocks. Stock Abc has an expected return of 20%and a standard deviation of returns of 25%. Stock Xyz has an expected return of 12%and a standard deviation of returns of 10%. The correlation coefficient between thestock returns of Abc and Xyz is 0.3.Stock Abc comprises 60% of the portfolio, while stock Xyz comprises 40% of theportfolio.a. What is the expected return of your portfolio?b. What is the standard deviation of this portfolio's return?c. How would your answer in part b) change if you added five more stocks (withsimilar standard deviations of returns) to your portfolio? You do not need toprovide an actual number – just answer whether the standard deviation wouldgo up, stay the same, or go down. Please explain your answer for full credit.O FocusMacBook PrO

expected return = 0.6*20% + 0.4*12% = 16.80%

Answered: You hold a portfolio consisting of two…

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

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Suppose stock returns have a 2-factor structure. You observe a broad stock market portfolio A which earns on average 7.4% and has beta 0.5 on the first factor and beta 0.7 on the second factor; and another broad stock market portfolio B which earns on average 10.6% and has beta 1.2 on the first factor and beta 0.2 on the second factor. The risk free return is 3%. What do you expect to earn from a portfolio with beta 1 on the first factor and zero on the second factor?
You own a portfolio that has $1,800 invested in Stock A and $2,900 invested in Stock B. If the expected returns on these stocks are 9% and 15%, respectively, what is the expected return on the portfolio?
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