You want to invest in two shares, X and Y. The following data are available for the two shares:
Share X
Expected Return: 9%
Standard Deviation :14%
Beta: 1.10
Share Y
Expected Return: 7%
Standard Deviation: 12%
Beta : 0.85
If you invest 70 percent of your funds in Share X, the remainder in Share Y and if the correlation of returns between X and Y is +0.7, compute the expected return and the standard deviation of returns from the portfolio.
Expected return of the portfolio= ?PiRi=Weight of x*return of x+ Weight of Y*return of Y
=0.70*9%+0.30*7%=6.3%+21%=8.4%
Pi 
Ri 
PiRi 

SHARE X 
0.70 
9 
6.3 
SHARE Y 
0.30 
7 
2.1 
8.4 
Variance of portfolio =(Weight of X)^{2} *(Standard deviation of x)^{2}+ (Weight of B)^{2}*(Standard deviation of B)^{2}+(2Correlation
Of And B *standard deviation of A*standard deviation of B*weight of A*weight of B)
=0.7^{2}*0.14^{2}+0.3^{2}*0.12^{2}+ (2*0.7*0.14*0.12*0.7*0.3)=0.49*0.0196+(0.09*0.0144)+(1.4*0.0168*0.21)
=0.009604+0.001296+0.0.0049392=0.0158392
Standard deviation of the portfolio=?variance of the portfolio=?0.015839=0.125854=12.5854%
Thus expected return of the portfolio=8.4% and standard deviation of the portfolio=12.59%
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