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given expected return for asset 1=12%,expected return for asset 2=16%,stander deviation for asset 1=4%, stander deviation...

given expected return for asset 1=12%,expected return for asset 2=16%,stander deviation for asset 1=4%, stander deviation for asset 2=6%,and correlation between asset 1 and 2=0.60,find out the portfolio return and portfolio stander deviation if the weight of asset 1 and asset 2 are

a.0.50 and 0.50

b. 0.30 and 0.70

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Answer #1

a.

Portfolio return =a1 ratio * a1 er + a2 ratio * a2 er = 0.5 * 0.12 + 0.5 * 0.16 = 0.14

Portfolio SD = [a1 ratio (a1 er - p er)^2 + a2 ratio (a2 er - p er)^2]^1/2 =[ 0.5 (0.12 - 0.14)^2 + 0.5 (0.16 - 0.14)^2]^1/2 = (0.0002 + 0.0002)^1/2 = 0.02

b.

Portfolio return =a1 ratio * a1 er + a2 ratio * a2 er = 0.3 * 0.12 + 0.7 * 0.16 = 0.148

Portfolio SD = [a1 ratio (a1 er - p er)^2 + a2 ratio (a2 er - p er)^2]^1/2 =[ 0.3 (0.12 - 0.148)^2 + 0.7 (0.16 - 0.148)^2]^1/2 = (0.0002352 + 0.0001008)^1/2 = 0.0183

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