Question
A portfolio is composed of two stocks, A and B. Stock A comprises 70% of the portfolio (wA = .7), while stock B comprises 30%
A portfolio is composed of two stocks, A and B. Stock A comprises 70% of the portfolio (wA = .7), while stock B comprises 30% of the portfolio (wB = .3). The correlation coefficient between the returns on the stock A and stock B (A,B) is .50. The following table presents the expected returns and the standard deviations of the two stocks.
| Expected Return (E(Ri)) | Standard Deviation (i) | |
| Stock A | 12% | 17% |
| Stock B | 5% | 14% |
(1) What is the portfolio expected rate of return (E(Rp))?
(2) What is the covariance between the returns on the stock A and B?
(3) What is the variance of the return on the portfolio?
(4) What is the standard deviation of the return on the portfolio?
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