06 Dec An investor has decided to form a portfolio by put
An investor has decided to form a portfolio by putting 25% of his money into McDonald’s stock and 75% into Cisco Systems stock. The investor assumes that the expected returns will be 8% and 15%, respectively, and that the standard deviations will be 12% and 22%, respectively. Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 235 RANDOM VARIABLES AND DISCRETE PROBABILITY DISTRIBUTIONS a. Find the expected return on the portfolio. b. Compute the standard deviation of the returns on the portfolio assuming that i. the two stocks’ returns are perfectly positively correlated. ii. the coefficient of correlation is .5. iii. the two stocks’ returns are uncorrelated.
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