An investor has $25,000 in cash to invest and additionally decides to short sell Stock A. The cash and proceeds from the short sale ($15,000) are used to invest in Stock B. Stock A and Stock B have zero correlation. Stock A's expected return is 30% with volatility of 48%; Stock B's expected return is 10% with volatility of 22%.

a. Estimate the portfolio's expected return and variance.

b-Comment on the effect of short selling on portfolio volatility relative to the volatility of the individual stocks. What could explain the findings?

 

Answer rating: 100% (QA)

SOLUTION a To estimate the portfolios expected return and variance we need to calculate the weights ... View the full answer