Year $201020112012201320142015$

Stock A: $-9\%8\%9\%-2\%3\%10\%$

Stock B: $28\%4\%9\%-3\%-9\%15\%$

Using the data in the following table, $-$ consider a portfolio that maintains a $40\%$ weight on stock A and a $60\%$ weight on stock $B.$

a$.$ What is the return each year of this portfolio?

b$.$ Based on your results from part $($a$),$ compute the average return and volatility of the portfolio.

c$.$ Show that $($i$)$ the average return of the portfolio is equal to the $($weighted$)$ average of the average returns of the two stocks, and $($ii$)$ the volatiity of the

portiolio equals the same result as from the calculation in Eq$.11\mathrm{.}9.$

d$.$ Explain why the portiolio has a lower wolatility than the average volatily of the two stocks.

a$.$ What is the return each year of this portfolio?

Enter the return of this portfolio for each year in the table below: $($Round to two decimal places.$)$

b$.$ Based on your results from part $($a$),$ compute the average retum and volatility of the portlolio. The average return of the portfolio is

$\%.($Round to two decimal places.$)$

The volatility of the portfolio is $($Round to two decimal places.$)$

c$.$ Show that $($i$)$ the average return of the portfolio is equal to the $($weighted$)$ average of the average returns of the two stocks, and $($ii$)$ the volatiity of the portiolio equals the same result as from the calculation $($w$12\backslash$sigma $12+$ w$22\backslash$sigma $22+2$w$1$w$2$Cov$)$

The average annual return for stock $A$ is

$\%.($Round to two decimal places.$)$

The average annual return for stock $B$ is

$\%.($Round to two decimal places.$)$

The $($weighted$)$ average of the average returns of the two stocks is

$\%.($Round to two decimal places.$)$

The volatility of the portolio is

$\%.($Round to two decimal places.$)$

d$.$ Explain why the portiolio has a lower volatlity than the average volatility of the two stocks. $($Select from the drop$-$down menu.$)$

The portfolio has a volatily than the average volatility of the two stocks because some of the idiosyncratic risk of the stocks in the portfolio is

diversified away.