Ahmed Zahran is building a new portfolio that consists of two stocks, A and B. Stock A will represent 40% of his portfolio while stock B will represent the remaining 60%. The expected returns for 10 years, 2016 to 2025, are shown in the following table:

a. Calculate the expected portfolio return, r_p, for each of the 10 years.

b. Calculate the average expected portfolio return over the 10-year period.

c. Calculate the standard deviation of the portfolio over the 10-year period.

d. How would you characterize the correlation of returns between the two stocks?

e. Discuss any benefits of diversification achieved by Ahmed through the creation of this portfolio.
 

Transcribed Image Text:

Year Expected Return (Stock A) Expected Return (Stock B) 2016 14% 25% 2017 14% 23% 2018 16% 20% 2019 17% 18% 2020 2021 17% 19% 17% 16% 2022 21% 14% 12% 10% 8% 2023 22% 2024 22% 2025 24% Year Expected Return (Stock A) Expected Return (Stock B) 2016 14% 25% 2017 14% 23% 2018 16% 20% 2019 17% 18% 2020 2021 17% 19% 17% 16% 2022 21% 14% 12% 10% 8% 2023 22% 2024 22% 2025 24%

Answer rating: 100% (QA)

Formula sheet A B C D E F G H I J 2 a and b 3 For investment in two securities portfolio return can ... View the full answer