1. Stocks Land m have yielded the following returns for the past two years.

Years

Returns

1995

12

14

1996

18

12

A) What is the expected returns on portfolio made up of 60% of L and 40% of

M?
B) Find out the standard deviation of each stocks?
C) What is the co-variance and co-efficient of correlation between stock L and
M?
D) What is the portfolio risk of a portfolio made up 60 % of L and 40% M?
SOLUTION:A) EXPECTED RETURN

R
n

Return of stock L=

Returns of m=

12+18
=15
2

14 +12
=13
2

Portfolio returns =

SO

X1

X 1 R1
i=1

being the portfolio held by each security which includes 60% of L and

40% of M
= (0.615) + (0.413)
=14.2
b) Standard deviation of each stock

1) 2
( R1 R
N

( 1215 ) 2+ ( 1815 ) 2
2

9+ 9
2

L =3

SO

m =

^ m)2
( Rm R
N

1213
2
2
= (1413) +
2

So

2
2
m =1

C. The co -variance

m
R m ^
R
^
= (R R
1
1 )()
N

COV XY

(3 ) +(3)
=
=-3
2
COV XY
CORELATION COEFFICIENT IS r]=
M L
3

= 3 1 =-1

d). portfolio risk

2
1

2L + X 22 2M + 2 X 1 X 2 (r 12 1 2 )

=1.4

.62 9+0.4 2 1+ 2.6 .4 ( 3 1 1 )

2. Stock y and z have the following parameters

Expected return
Expected variances
Covariance yz

Stock y
20
16
20

Stock z
30
25

Is there any advantages of holding a combination of Y and Z?

Solution:-

COV xy
= x y

r xy

20

= 4 5
= 1
Note: - there is no any advantages of holding a combination of y and z, as risk
cant reduce because they are perfectly positive correlation
3. The expected rates of return and the possibilities occurrence for alpha
company and Bita company scrips are given below

Probabilities occurrence
Return of alpha scrips
0.05
-2.0
0.20
9.0
0.50
12.0
0.20
15.0
0.05
26.0
A find out the return of alpha and beta scrips

Return of bita scrips

-3.0
6.0
11.0
14.0
19.0

B.if and investors invests equal proportion on both the scrips what would be the
return?
C.if the proportion is changed to 25% and 75% and then to 75 % and 25% what
would be the expected ?
Solution:N

R
=

RI PI
I=1

RETURN OF ALPHA COMPANY =

R I P I + R 2 P 2 + R3 P 3 + R 4 P 4 + R 5 P 5
=-2.0(0.05) +9.0(.20) +12(.50) +15(.2)+26(.05)
= 12%

RETURN OF BITA COMPANY =-3.0(.05) +6(.2) +11(.5) +14(.2) +19(.05)

=10.3%
B) IF AN INVESTORS INVESTS EQUAL PORTION OF %,THEN
N

RP = R I P I
I=1

RP

=.5 12+.5 10.3

RP =11.5
C).75% OF ALPHA SECURITY AND 25%OF BETA SECURITY

RP =.75 12+.25 10.3

=11.575
25% OF THE BETA SECURITY

RP = 0.25 12+.75 10.3

=10.725
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