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Using the data in the following table, consider a portfolio that maintains a 60% weight on stock A and a 40% weight on stock B.

Using the data in the following table, consider a portfolio that maintains a 60% weight on stock A and a 40% weight on stock B.

Year

2010

2011

2012

2013

2014

2015

Stock A

14%

9%

4%

7%

3%

5%

Stock B

25%

8%

6%

10%

10%

20%

a. What is the return each year of this portfolio?

b. Based on your results from part (a), compute the average return and volatility of the portfolio.

c. Show that (i) the average return of the portfolio is equal to the (weighted) average of the average returns of the two stocks, and (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.9.

d. Explain why the portfolio has a lower volatility than the average volatility of the two stocks.

image text in transcribed

a. What is the return each year of this portfolio? Enter the return of this portfolio for each year in the table below: (Round to two decimal places.) 2010 2011 2012 2013 2014 2015 Year Portfolio % % b. Based on your results from part (a), compute the average return and volatility of the portfolio. The average return of the portfolio is %. (Round to two decimal places.) The volatility of the portfolio is %. (Round to two decimal places.) c. Show that (i) the average return of the portfolio is equal to the weighted) average of the average returns of the tu stocks, and (ii) the volatility of the portfolio equals the same result as from the calculation in Eq. 11.9. The average annual return for stock Ais %. (Round to two decimal places.) The average annual return for stock B is %. (Round to two decimal places.) The (weighted) average of the average returns of the two stocks is %. (Round to two decimal places.) The volatility of the portfolio is %. (Round to two decimal places.)

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