Following is a portfolio containing two stocks and the annual returns from 2010
ID: 2781327 • Letter: F
Question
Following is a portfolio containing two stocks and the annual returns from 2010 through 2016. Based on the data, determine the riskiness of the individual stocks and then determine the portfolio risk. What is the effect of holding the shares in a portfolio as opposed to individually? Explain what causes this effect.
A
B
2010
16%
-4%
2011
19%
6%
2012
12%
4%
2013
7%
7%
2014
7%
3%
2015
8%
8%
2016
2%
8%
Following is a portfolio containing two stocks and the annual returns from 2010 through 2016. Based on the data, determine the riskiness of the individual stocks and then determine the portfolio risk. What is the effect of holding the shares in a portfolio as opposed to individually? Explain what causes this effect.
A
B
2010
16%
-4%
2011
19%
6%
2012
12%
4%
2013
7%
7%
2014
7%
3%
2015
8%
8%
2016
2%
8%
Explanation / Answer
Standard Deviation can be calculated using STDEV.S function in excel or using mathematical formulas as well.
We can see that Stock A has a higher risk (std. dev.) than Stock B. But if we have a portfolio with 50/50 allocation to A and B, we get even lower risk than either of them. This is due to the benefit of diversification.
A B Portfolio 2010 16% -4% 6% 2011 19% 6% 13% 2012 12% 4% 8% 2013 7% 7% 7% 2014 7% 3% 5% 2015 8% 8% 8% 2016 2% 8% 5% Std. Dev. 5.87% 4.24% 2.59%