Portfolio Returns

Description

Attached are hypothetical monthly returns for Apple and P&G. The objectives of this exercise are to calculate the risk-reward relationship of a portfolio.

Directions

Assume you are creating a portfolio that invests 50% in Apple and 50% in P&G.
1. Calculate the following statistics:


2. Analytically calculate the portfolio's expected return and standard deviation.


3. Computationally calculate:


Questions

  1. Verify the results from (2) and (3) are the same.
  2. Both Apple and P&G have expected returns of 5%. The portfolio also has an expected return of 5%. However, both Apple and P&G have standard deviations of 10% yet the portfolio's standard deviation is not 10%. What explains these results?
  3. What is the portfolio's standard deviation if the correlation between Apple and P&G is 1.00?

Solutions