I need to know step by step how the answer was achieved. I do not want to just g

Question

I need to know step by step how the answer was achieved. I do not want to just get the right answer, I need to understand it as I am having a test. Thanks

An analyst is examining the following two-stock portfolio"

stock Portfolio weight Expected Return Standard deviation

X 0.30 18% 35%

Y 0.70 11% 35 %

What is the portfolios expected return?

If randomly selected stocks are added to the portfolio until the portfolio has no asset- specific risk remaining, which of the following is the best estimate o the portfolios standard deviation of returns?

20%

50%

0%

35%

70%

The tradeoff between risk and return is a cornerstone concept in finance. If a security offers a highly expected return, it mush have higher risk. Look at the two stocks described in this problem. They have the same risk, but one stock has a higher expected return. Does this example contradict the tradeoff between risk and return?

Yes

No

Explanation / Answer

Hi,

Please find the answer as follows;

Part A:

Expected Return = (WeightX * E(r)X) + (WeightY * E(r)Y) = .30*18% + .70*11% = 13.1%

Part B:

Best Estimate to Standard Deviation = = (WeightX * SD of X) + (WeightY * SD of Y) = .30*35 + .70*35 = 35%

Part C:

The answer is No.

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