Stock X has an expected return of 13% and a standard

deviation of 6%. Stock Y has an expected return of 11%

and a standard deviation of 5%. You have decided to
split your total investment by putting 40% in X and 60%
in Y. If the returns have a covariance of -.0015, what is
expected return and standard deviation of your
portfolio?

a.
What is the expected return of the portfolio
(m.4X+.6Y)?
b.
What is the standard deviation of the portfolio
(s.4X+.6Y)?
c.
How does the standard deviation of the portfolio
(s.4X+.6Y) compare to the standard deviations of
assets X and Y?

E[R] S Weight COV(X,Y)

X 13% 6% 40% -0.0015
Y 11% 5% 60%
a.
What is the expected return of the portfolio
(m.4X+.6Y)? 11.800%
b.
What is the standard deviation of the portfolio
(s.4X+.6Y)? 2.750%
c.
How does the standard deviation of the portfolio Standard deviation of the portfolio is intuitively less than that for either individual securities. Again, we see th
(s.4X+.6Y) compare to the standard deviations of through diversifying risk and the fact that the two assets are negatively correlated. Thus, a portfolio combinati
assets X and Y? the two assets yields a weighted average return, while reducing overall risk

E[R] S Var
X 13% 6% 0.00360
Y 11% 5% 0.00250

a.) E[R_port] 11.800%

b.) SD_Port: First compute Portfolio Variance

Var_Port: 0.000756
S_Port: 0.027495
2.750%
r individual securities. Again, we see this result
correlated. Thus, a portfolio combination of
risk

Weight COV(X,Y)
40% -0.0015
60%