Anna Cintara is constructing different portfolios from the following two stocks: 

1. Calculate the covariance between the returns on the two stocks. 

2. What is the portfolio expected return and standard deviation if Cintara puts 100 percent of her investment in Stock 1 (w₁ = 1.00 and w₂ = 0.00)? What is the portfolio expected return and standard deviation if Cintara puts 100 percent of her investment in Stock 2 (w₁ = 0.00 and w₂ = 1.00)?

3. What are the portfolio expected return and standard deviation using the current portfolio weights? 

4. Calculate the expected return and standard deviation of the portfolios when w₁ goes from 0.00 to 1.00 in 0.10 increments (and w₂ = 1 – w₁). Place the results (stock weights, portfolio expected return, and portfolio standard deviation) in a table, and then sketch a graph of the results with the standard deviation on the horizontal axis and expected return on the vertical axis.  

Transcribed Image Text:

Exhibit 5: Description of Two-Stock Portfolio Expected return Standard deviation Current portfolio weights Correlation between returns Stock 1 4% 6% 0.40 0.30 Stock 2 8% 15% 0.60