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Understanding of expected returns

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Reference no: EM133120204

A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the investor's expected rate of return. Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio. Consider the following case: Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table:

Stock

Percentage of Portfolio

Expected Return

Standard Deviation

Artemis Inc.

20%

6.00%

38.00%

Babish & Co.

30%

14.00%

42.00%

Cornell Industries

35%

13.00%

45.00%

Danforth Motors

15%

3.00%

47.00%

What is the expected return on Andre's stock portfolio?

  • 15.60%
  • 14.04%
  • 10.40%
  • 7.80%

Suppose each stock in Andre's portfolio has a correlation coefficient of 0.4 (ρ = 0.4) with each of the other stocks. If the weighted average of the risk of the individual securities (as measured by their standard deviations) included in the partially diversified four-stock portfolio is 43%, the portfolio's standard deviation (σpσp) most likely is (less than/ more tan)  43%.

Reference no: EM133120204

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