Question

Given the following information

A. Estimate the monthly expected return of the AAA stock.

B.  Estimate the standard deviation of BBB stock’s monthly returns

C.  Estimate the monthly expected return of a portfolio of 40% AAA and 60% BBB. Assume you purchase these shares in July 2018

D. Estimate the standard deviation of a portfolio of 40% AAA and 60% BBB monthly returns

Enter your answer as a percent. Do not include the % sign. Round your final answer to two decimals.

	Stock Price
Month	AAA	BBB
Jan-18	100	75
Feb-18	120	80
Mar-18	140	95
Apr-18	110	100
May-18	115	85
Jun-18	95	90
Jul-18	100	100

Answer 1

Formulas:

Monthly return = (This month's price/last month's price) -1

Average return = sum of all returns/number of observations

Standard deviation = {sum of [(monthly return - average return)^2]/number of observations}^0.5

Portfolio return = (0.4*return of AAA) + (0.6*return of BBB)

Formula Pa Pb Stock price (BBB) Ra = (Pan/Pan-1)-1 Monthly return (AAA) Rb = (Pbn/Pbn- 1)-1 Monthly return (BBB) (Rb-R)^2 Stock price (AAA) 100 120 75 80 95 110 100 Month (m) Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Sum of column Total (T) T/number of observations Return ('R) Square root of R Standard deviation (SD) 115 85 20.00% 16.67% -21.43% 4.55% -17.39% 5.26% 7.66% 1.28% 6.67% 18.75% 5.26% -15.00% 5.88% 11.11% 32.67% 5.45% 95 0.000149 0.017701 0.000003 0.041802 0.000019 0.003210 0.062884 0.010481 10.24% 100 100

A). Monthly expected return for AAA = 1.28%

B). Standard deviation for BBB = 10.24%

Formula Ra Rb (0.4*Ra)+(0.6*Rb) (Pr - R)^2 Portfolio standard deviation Portfolio return Monthly Monthly return Month (m) return (AAA) (BBB) Jan-18 Feb-18 20.00% 6.67% Mar-18 16.67% 18.75% Apr-18 -21.43% 5.26% May-18 4.55% -15.00% 5.88% Jul-181 5.26% 11.11% Sum of column Total (T) T/number of observations Return ('R) Square root of R Standard deviation (SD) 12.00% 17.92% -5.41% -7.18% 3.43% 8.77% 22.67% 3.78% 0.006761 0.019991 0.008448 0.012011 0.005191 0.002494 0.054896 0.009149 9.57%

C). Monthly expected return of the portfolio = 3.78%

D). Standard deviation for the portfolio's returns = 9.57%