Essay About Volatility        Weight Large-Cap Stocks And Weight Stockse

Investment Homework
Part 1:Question 1)a)                                E(R)        Volatility        Weight Large-Cap Stocks                15%        15%                75%Government Bonds                5%        10%                25%Correlation: 0.5To calculate Expected return, we took the sum of all of the weights multiplied by their respective expected returns.  (.15*.75)+(.05*.25) = 12.5%To calculate the volatility of the portfolio, we used the formula as prescribed in the lecture.  Each weight squared multiplied by their variance, plus 2 times each weight times each standard deviation times the correlation.  ((.752)*(.152))+ ((.252)*(.102))+2*.5*.15*.10*.75*.25 = 12.69% Expected ReturnVolatility12.50%12.69%b)Weight StocksE(Rp)Volatility (p)0%5%10%10%6%10%[pic 1]20%7%10%30%8%10%40%9%10%50%10%11%60%11%12%70%12%12%80%13%13%90%14%14%100%15%15%c)  As the correlation decreases, the curve becomes more and more convex.  When the correlation is -1.0, the curve becomes two lines, touching the y axis.  This indicates that it is possible to achieve this return without risk.  This return is the risk-free weight.[pic 2][pic 3][pic 4][pic 5]When the correlation is 1, the line becomes straight, as both securities behave the same way.