Question

1. The expected return on the NASDAQ portfolio is 17.5% and its return volatility is 30%. The risk-free rate is 2.5%. You think that you can create a portfolio with the same expected return but lower risk by (1) putting 50% of your money into the portfolio of large world stocks with the expected return of 10% and return volatility of 20%; (2) putting the remaining 50% of your money into the portfolio of small US stocks with the expected return of 25% and return volatility of 45%. The correlation between the portfolio of large world stocks and the portfolio of small US stocks is 70%. It is easy to check that the expected return of your portfolio is indeed the same as that of NASDAQ. Will your portfolio have lower risk?

	a.	No: the return volatility of my portfolio is 30.35%, which is higher than NASDAQ’s 30%.
	b.	Yes: the return volatility of my portfolio is 27.26%, which is lower than NASDAQ’s 30%.
	c.	Yes: the return volatility of my portfolio is 29.60%, which is lower than NASDAQ’s 30%.
	d.	Yes: the return volatility of my portfolio is 24.62%, which is lower than NASDAQ’s 30%.
	e.	Yes: the return volatility of my portfolio is 22.47%, which is lower than NASDAQ’s 30%.

Answer 1

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Ans: A. No: the return volatility of my portfolio is 30.35%, which is higher than NASDAQ’s 30%