Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio. Consider...
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Finance
Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio.
Consider the following case:
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:
Stock
Percentage of Portfolio
Expected Return
Standard Deviation
Artemis Inc.
20%
6.00%
31.00%
Babish & Co.
30%
14.00%
35.00%
Cornell Industries
35%
11.00%
38.00%
Danforth Motors
15%
3.00%
40.00%
What is the expected return on Andres stock portfolio?
9.70%
7.28%
13.10%
14.55%
Suppose each stock in Andres 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 36%, the portfolios standard deviation (pp) most likely is (less than, greater than, equal) 36%.
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