2. Two stocks A and B have expected returns, and a variance-covariance matrix of returns given...

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Finance

2. Two stocks A and B have expected returns, and avariance-covariance matrix of returns given in Table 1.
Table 1 Stock A
Stock B
E(R)
0.14
0.08
Variance-covariance matrix:
Stock A
Stock B
Stock A
0.04
0.012
Stock B
0.012
0.0225
a) What is the correlation coefficient between the returns onstock A and stock B?
b) What is the expected return and standard deviation ofportfolio S which is invested 80% in stock A and 20% instock B?
c) If you combine portfolio S with a risk free assetpaying a return of 4%, what would be the expected return on a newportfolio V if you desire a standard deviation of27.9%?
d) Plot in mean-standard deviation space the efficiency frontierbetween Stock A and Stock B, and identify portfolios S andV.

Answer & Explanation Solved by verified expert

4.2 Ratings (749 Votes)

Part ACorrelation coefficient ie r CoVABSDA SDBWhereCOVAB covariance between A and B 012VarA variance of A04VarB variance of B 0225SDA 045 2SDB See Answer

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2. Two stocks A and B have expected returns, and avariance-covariance matrix of returns given in Table 1.Table 1 Stock AStock BE(R)0.140.08Variance-covariance matrix:Stock AStock BStock A0.040.012Stock B0.0120.0225a) What is the correlation coefficient between the returns onstock A and stock B?b) What is the expected return and standard deviation ofportfolio S which is invested 80% in stock A and 20% instock B?c) If you combine portfolio S with a risk free assetpaying a return of 4%, what would be the expected return on a newportfolio V if you desire a standard deviation of27.9%?d) Plot in mean-standard deviation space the efficiency frontierbetween Stock A and Stock B, and identify portfolios S andV.

Table 1 Stock A		Stock B
E(R)	0.14		0.08
Variance-covariance matrix:
Stock A		Stock B
Stock A	0.04		0.012
Stock B	0.012		0.0225