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Suppose Ford Motor stock has an expected return of 20 % and a volatility of 40 %​, and Molson Coors Brewing has an expected return of 10 % and a volatility of 30 %. If the two stocks are​ uncorrelated, a. What is the expected return and volatility of a portfolio consisting of 50 % Ford Motor stock and 50 % of Molson Coors Brewing​ stock? b. Given your answer to ​(a​), is investing all of your money in Molson Coors stock an efficient portfolio of these two​ stocks? c. Is investing all of your money in Ford Motor an efficient portfolio of these two​ stocks? a. What is the expected return and volatility of a portfolio of 50 % Ford Motor stock and 50 % of Molson Coors Brewing​ stock? The expected return of the portfolio is

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Answer:

a) Expected return is 15% and volatility is 25%

b) No. The portfolio is dominated equally 50 - 50.

c) Yes. It is not dominated.

Explanation:

a) An image showing the step by step solution is attached.

The table in the image is use to solve b and c.

b) No. The portfolio is dominated equally from the table.

c) Yes. It is not dominated.

To get the optimal portfolio we shall compute the proportion of weights that will be invested the Ford Motor and Molson Coors.

Proportion of weight of Ford Motor = (Variance of Molson Coors - Covariance of Ford Motor and Molson Coors) / (Variance of Molson Coors+Variance of Ford Motor - 2 covariance of Ford Motor and Molson Coors)

Proportion of weight of Ford Motor = (0.30^2 - 0)/( 0.30^2 + 0.40^2 -0)

= 0.09/0.25

= 0.36

Therefore, the weight of Molson Coors is:

= 1 - 0.36 = 0.64

An optimal efficient portfolio will consist of 36% of Ford Motor and 64% Molson Coors.

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