ou have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio: Tesla Eagle Expected return 13% 20% Standard Deviation of return 20% 45% Correlation of coefficient (p) 0.4 Compute the expected return of your portfolio. Also, Compute the expected risk (standard deviation) of the portfolio.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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  1. You have another portfolio that comprises of two shares only: $500 Tesla shares and $700 Eagle shares. Below is the data of your portfolio:

 

 

Tesla

Eagle

Expected return

13%

20%

Standard Deviation of return

20%

45%

Correlation of coefficient (p)

0.4

 

Compute the expected return of your portfolio. Also, Compute the expected risk (standard deviation) of the portfolio. 

Expert Solution
Step 1

Tesla return (RA) = 13%

Eagle return (RB) = 20%

Tesla weight (WA) = 500/(500+700)

                    = 500/1200

                    = 0.4167

Eagle return (WB) = 1-0.4167 = 0.5833

 

Therefore

        Expected return of portfolio = (RA*WA)+(RB*WB)

                                                         = (0.13*0.4167)+(0.20*0.5833)

                                                         = 0.0542+0.1167

                                                         = 0.1709 or 17.09%

 

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