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you decide to create two stock portfolio of stock B and D. Calculate the Correlation between the two stocks and the Stan…
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you decide to create two stock portfolio of stock B and D. Calculate the Correlation between the two stocks and the Standard Deviation of each stock. use this information to determine the Expected Return and Standard Deviation of the minimum variance portfolio between the two securities.
t A % B % C % D % MARKET %
1 18.23 18.56 12.43 12.82 12.28
2 18.24 15.27 13.45 15.82 5.99
3 14.71 14.12 4.32 12.58 12.41
4 -6.56 -1.57 -8.54 -9.36 -4.48
5 9.12 13.16 12.21 12.45 13.41
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2023-03-15T10:00:11+00:00
2023-03-15T10:00:11+00:00 1 Answer
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Unfortunately, the data provided in the question is not sufficient to calculate the correlation between the two stocks and the standard deviation of each stock. The table only provides the returns of each stock and the market returns for five periods, but we would need more data to calculate those measures.
However, assuming we had the necessary data, we could use the following steps to determine the expected return and standard deviation of the minimum variance portfolio:
Calculate the correlation coefficient between the two stocks using the formula:
Correlation Coefficient = Covariance / (Standard Deviation of Stock B x Standard Deviation of Stock D)
Calculate the standard deviation of each stock using the formula:
Standard Deviation = SQRT(Variance)
Determine the weights of each stock in the minimum variance portfolio. This can be done using the formula:
Weight of Stock B = (Standard Deviation of Stock D)^2 / (Standard Deviation of Stock B)^2 + (Standard Deviation of Stock D)^2
Weight of Stock D = 1 – Weight of Stock B
Calculate the expected return of the minimum variance portfolio using the formula:
Expected Return = Weight of Stock B x Expected Return of Stock B + Weight of Stock D x Expected Return of Stock D
Calculate the standard deviation of the minimum variance portfolio using the formula:
Standard Deviation = SQRT((Weight of Stock B)^2 x (Standard Deviation of Stock B)^2 + (Weight of Stock D)^2 x (Standard Deviation of Stock D)^2 + 2 x Weight of Stock B x Weight of Stock D x Standard Deviation of Stock B x Standard Deviation of Stock D x Correlation Coefficient)
Note that we cannot perform these calculations without the necessary data.