Question

You are considering three investment choices: a. 1 year CD that pays 2% for sure; b....

You are considering three investment choices: a. 1 year CD that pays 2% for sure; b. investing in SP500 with 8% expected and 20% stdev.; c. a long term bond with 4% mean return and 10% stdev annually. Stock and bond funds have a correlation of -0.4 (negative 0.4).

What is the mean return and stdev for a portfolio that is 50% in stock and 50% in bond?

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Answer #1

Expected return of a portfolio is weighted average of the returns of the constituents.

Expected return = 50% * 8% + 50% * 4% = 6%

Standard deviation of a portfolio is mathematically represented as:

Standard deviation = 9.21%

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