Andre is an amateur investor who holds a small portfolia consisting of only four
ID: 2821446 • Letter: A
Question
Andre is an amateur investor who holds a small portfolia consisting of only four stocks. The stock holdings in his portfolio are shown in the following table: Percentage of Portfolio 20% 30% 35% 15% Expected Return 8.00% 14.00% 11.00% 5.00% Standard Deviation 23.00% 27.00% 30.00% 32.00% Stock Artemis Inc. Babish & Co. Comell industries Danforth Motors What is the expected return on Andr's stock portfoli? 10.40% 14.04% 7.80% 15.60% Suppose each stock in Andre's portfolio has a correlation coefficient of O. (p-04) with each of the other stocks. If the weighted average of the risk of the indwidual securties es measured by their standard desviatons) included in the partially diversified four-stock portfolio is 28%, the portfolio's standard deviation (%) most likely is 28%Explanation / Answer
Given that - Expected return = sum of (% of portfolio * expected return i ii iii iv=ii*i Stock % of portfolio expected return Standard deviation Expected return*Weight Artemis Inc. 20% 8% 23% 1.600% Babish & co. 30% 14% 27% 4.200% Comell Industries 35% 11% 30% 3.850% Danforth Motors 15% 5% 32% 0.750% 10.400% Hence correct answer is 10.4% Suppose each stock in Andre's portfolio has a correlation coefficient of 0.4 with each of the other sector. If the weighted average of the risk of the individual securities included in the partial diversified four- stock portfolio is 28% , portfolio standard deviation most likely is Lower than 28% Explanation : With the benefit of diversification SD of portfolio will be lower than its weighted average risk.