Question

Suppose you invest your risky portfolio into one stock and one corporate bond. 50% of your fund is invested in a stock with an expected return of 14% and a standard deviation of 24%. The rest 50% of your fund is invested in a corporate bond with an expected return of 6% and a standard deviation of 12%. The stock and the bond have a correlation of 0.55. What are the expected return and the standard deviation of the resulting risky portfolio?

Answer 1

	Expected return%=	Wt Stock*Return Stock+Wt Bond*Return Bond
	Expected return%=	0.5*0.14+0.5*0.06
	Expected return%=	10
	Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
	Variance	=0.5^2*0.24^2+0.5^2*0.12^2+2*0.5*0.5*0.24*0.12*0.55
	Variance	0.02592
	Standard deviation=	(variance)^0.5
	Standard deviation=	16.10%