Andre is an amateur investor who holds a small portfolio consisting of only four
ID: 2788522 • 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 20% 30% 3590 15% Expected Return 6.00% 14.00% 11.00% 5.00% Standard Deviation 29.00% 33.00% 36.00% 38.00% Stock Artemis Inc. Babish & Co Cornell Industries Danforth Motors What is the expected return on Andre's stock portfolio? O 7.50% O 15.00% O 10.00% O 13.50% Suppose each stock in Andre's portfolio has a correlation coefficient of 0.4 (-0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the partially diversified four-stock portfolio is 34%, the portfolio's standard deviation (op) most likely is 34%Explanation / Answer
a.
Expected return = (20% × 6%) + (30% × 14%) + (35% × 11%) + (15% × 5%)
= 1.20% + 4.20% + 3.85% + 0.75%
= 10.00%
Expected return of portfolio is 10.00%.
b.
Each stock of portfolio has correlation coefficient of 0.40 with each of teh other stock. if the weightage average of risk if individual securities includes nin partially diversified fout stock portfolio is 34% then the portfolio standard deviation most likely less than 34%.