Over the past three years (Year 1 to Year 3) the stocks of two companies, ONE Plc and TWO Plc, generated annual returns to shareholders as follows:
|
ONE Plc
|
TWO Plc
|
|
|
Year 1
|
-5%
|
2%
|
|
Year 2
|
15%
|
1%
|
|
Year 3
|
12%
|
4%
|
For each of the three years (Year 1, Year 2, Year 3), calculate the annual return generated by a portfolio that is made up of the two stocks ONE and TWO with 80 percent of the portfolio invested in stock ONE and the rest in stock TWO.
(ii) Based on the annual portfolio returns, calculate the expected (average) portfolio return and the standard deviation of portfolio returns.
(iii) Can the standard deviation of the portfolio returns be approximated as the weighted average of the individual stock returns? Explain why or why not.