Andre is an amateur investor who holds a small portfolio consisting of only four
ID: 2788497 • Letter: A
Question
Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table: Percentage of Portfolio 2090 30% 35% 15% Expected Return 8.00% 14.00% 12.00% 3.00% Standard Deviation 36.00% 40.00% 43.00% 45.00% Stock Artemis Inc. Babish & Co Cornell Industries Danforth Motors What is the expected return on Andre's stock portfolio? O 7.84% O 14.11% O 10.45% O 15.68% Suppose each stock in Andre's portfolio has a correlation coefficient of 0.40 ( = 0.40) with each of the other stocks The market's average standard deviation is approximately 20%, and the weighted average of the risk of the individual securities in the partially diversified four-stock portfolio is 41% If 40 additional, randomly selected stocks with a correlation coefficient of 0.30 with the other stocks in the portfolio were added to the portfolio, what effect would this have on the portfolio's standard deviation (Op)? O It would gradually settle at approximately 20%. It would stay constant at 41% It would decrease gradually, settling at about 0% It would gradually settle at about 35%Explanation / Answer
1.
Expected return = (20% × 8%) + (30% × 14%) + (35% × 12%) + (15% × 3%)
= 1.60% + 4.20% + 4.20% + 0.45%
= 10.45%
Expected return of stock portfolio is 10.45%.
Option (C) is correct answer.
b.
Current Standard deviation of 4 equally weightage stock portfolio is 41%. Correlation between stocks in portfolio is 0.40. if another 30 stock with correlation of 0.30 is added in portfolio, then standard deviation of total portfolio must be lower than 41% and it is gradually settle at market standard deviation that is 20%.
Option (A) is correct answer.