An Analysis of the Stock Market Produces the Following Information$\begin{array}{lcc}
& \text { Stock } 1 & \text { Stock } 2 \
\hline \text { Expected Returns } & 15 \% & 18 \% \
\text { Standard Deviations } & 20 & 32 \
\hline & &
\end{array}$

Question

An Analysis of the Stock Market Produces the Following Information$\begin{array}{lcc} 
& \text { Stock } 1 & \text { Stock } 2 \
\hline \text { Expected Returns } & 15 \% & 18 \% \
\text { Standard Deviations } & 20 & 32 \
\hline  & &
\end{array}$

Examlex · Accepted Answer

The Answer is a. The expected return on the portfolio is E(0.5X1 + 0.5X2) = 0.5E(X1) + 0.5E(X2)= 16.5%.
The variance of the portfolio's return is (0.5  20)2 + (0.5  32)2 + 2(0.5)2  0.80  20  32 = 612.
The standard deviation of the portfolio's return when 12 = 0.80 is therefore 24.74%.
b. Your choice of investment in stock 1, the portfolio, or stock 2 depends on your desired level of risk (variance of return). The higher the risk you choose, the higher will be the expected return.

An Analysis of the Stock Market Produces the Following Information

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