Question

You have a three-stock portfolio. Stock A has an expected return of 13 percent and a standard deviation of 38 percent, Stock B has an expected return of 17 percent and a standard deviation of 43 percent, and Stock C has an expected return of 17 percent and a standard deviation of 43 percent. The correlation between Stocks A and B is 0.30, between Stocks A and C is 0.20, and between Stocks B and C is 0.05. Your portfolio consists of 38 percent Stock A, 25 percent Stock B, and 37 percent Stock C. Calculate the expected return and standard deviation of your portfolio. The formula for calculating the variance of a three-stock portfolio is:

σ_p² = x_A² σ_A² + x_B² σ_B² + x_C² σ_C²+ 2x_Ax_Bσ_Aσ_BCorr(R_A,R_B) + 2x_Ax_Cσ_Aσ_CCorr(R_A,R_C) + 2x_Bx_Cσ_Bσ_CCorr(R_B,R_C)

(Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.