00:01
So today we're looking to build a portfolio and we're looking at building it with two stocks, stock one, stock two, where the expected return of stock one is 8 .45 % and return for stock two is 3 .4%.
00:14
The variance for stock one is 25, variance for stock two is one, and we're given that the covariance of one and two is three.
00:22
And the first thing we have to do is find the standard deviation.
00:27
So the variance, sigma squared, is just the standard deviation squared.
00:32
So sigma, standard deviation, sigma, you just take the square root of each.
00:35
So root 25 is five, root one is one.
00:37
So that's the first part.
00:39
The second part asks us to find the expected return of standard deviation for someone who invests $400 in stock one.
00:48
So for this one, it's pretty straightforward.
00:51
What we do is we just take the 400 multiplied by the return percentage, but as a multiplier, so 0 .0845, which is $33 .80.
01:05
The standard deviation is 400 times the standard deviation, but as a multiplier, 0 .05, which is $20.
01:16
All right, now for part c.
01:20
This is to find the expected return and standard deviation for a person who invests 50 % in stock one and 50 % in stock two.
01:36
So the formulas for these, the return, the mean return, say r bar, is the weight of one times the return of one plus the weight of the second times the return of the second.
01:47
So this is pretty straightforward.
01:49
It's, let's see, a half, so 0 .5 times 8 .45 plus a half times 3 .4.
02:03
And the value we get is 5 .925.
02:07
The standard deviation of the portfolio, well, to get the standard deviation of the portfolio, we need the variance of the portfolio, sigma squared...