Portfolio Theory and Bonds: Solved Questions and Formulas

FINANCE
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Chapter 25: Portfolio Theory
Question 1
Expected returns of portfolio = Weight of stock A *Expected returns on stock A + Weight of
stock B*Expected returns on stock B = 0.4*14 + 0.6*20 = 17.6%
The standard deviation of a two stock portfolio = √(0.42*0.32+ 0.62*0.52+
2*0.4*0.6*0.2*0.3*0.5) = 34.47%
Question 2
a) Expected returns of portfolio = 0.6*19 + 0.4*3 = 12.6%
Since T bill is considered a risk free asset, hence standard deviation of returns would be zero.
Standard deviation of portfolio = √(0.62*0.292 + 0.42*02+ 2*0.6*0.4*0.29*0) = 17.40%
b) Investment in stock A = 25%*60 = 15%
Investment in stock B = 32% *60 = 19.2%
Investment in stock C = 43% * 60 = 25.8%
Investment in T-bill = 40%
Chapter 5: Bonds
Question 1
The formula for bond price is given below.