3 1. Consider a portfolio consisting of the following three stocks: Portfolio weight Expected return Volatility...

 

Transcribed Image Text:

3 1. Consider a portfolio consisting of the following three stocks: Portfolio weight Expected return Volatility Stock A 0.45 20% 25% Stock B 0.35 15% 30% Stock C 0.2 8% 18% Although stock B has a high volatility, it is included in the 3-stock portfolio as the return of this stock is uncorrelated with the return of both stock A and stock C. The estimated covariance between stock A and stock C is 0.02. (a) [2 points] Calculate the expected return of the 3-stock portfolio. (b) [2 points] Calculate the correlation between stock A and stock C. (c) [3 points] Calculate the volatility of the 3-stock portfolio. (d) [2 points] Given the risk-free rate 3%, calculate the Sharpe ratio of this portfolio. 3 1. Consider a portfolio consisting of the following three stocks: Portfolio weight Expected return Volatility Stock A 0.45 20% 25% Stock B 0.35 15% 30% Stock C 0.2 8% 18% Although stock B has a high volatility, it is included in the 3-stock portfolio as the return of this stock is uncorrelated with the return of both stock A and stock C. The estimated covariance between stock A and stock C is 0.02. (a) [2 points] Calculate the expected return of the 3-stock portfolio. (b) [2 points] Calculate the correlation between stock A and stock C. (c) [3 points] Calculate the volatility of the 3-stock portfolio. (d) [2 points] Given the risk-free rate 3%, calculate the Sharpe ratio of this portfolio.

Answer rating: 100% (QA)

a The expected return of the 3stock portfolio is 045 20 035 ... View the full answer