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The expected return on Reebok
is 20%.
The standard deviation of Coca Cola
stock is 31.5%.
The standard deviation of Reebok
stock is 58.5%.
What is the expected return and
standard deviation of your portfolio?
Assume a
correlation coefficient of 1.
Portfolio Risk
Example
Suppose you invest 65% of your portfolio in Coca-Cola and 35% in
Reebok. Assume a correlation coefficient of 1.
The expected return on your portfolio is 10%*65% +
20%*35% = 13.50%.
%
31.7
1,006.1
Deviation
Standard
1
.
006
,
1
5)
1x31.5x58.
2(.65x.35x
]
x(58.5)
[(.35)
]
x(31.5)
[(.65)
Valriance
Portfolio
2
2
2
2
=
=
=
+
+
=
Portfolio Risk
The shaded boxes contain variance terms;
the
remainder
contain covariance terms.
1
2
3
4
5
6
N
1
2
3
4
5
6
N
STOCK
STOCK
To calculate
portfolio
variance add
up the boxes

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