Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Question
- 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
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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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