a) Calculate the expected return andstandard deviation of a portfolio invested in the following two risky assets.
Correlation coefficient ρ= - 0.49
b) Calculate the expected return of a complete portfolio invested equally in the risky portfolio calculated previously (a) and risk-free asset with 4% return. Compare your results?
|Security||Weight||E( R)||Standard Deviation|
|Correlation coefficient ρ||-0.49|
|Expected Portfolio Return E(P)||7.00%||W(A)* ER(A) +W(B)*ER(B)||[40%*10%+60%*5%]|
|Variance of Portfolio =Standard Deviation of Portfolio ^2 ----->SD(P)^2||W(A)^2 *SD(A) ^2+ W(B)^2 *SD(B)^2 +2*W(A)*W(B)*SD(A)*SD(B)*ρ||43.91646048|
|Standard Deviation of Portfolio||6.626949561|
|Risk-free asset (Rf)||4%||50%|
|Expected Portfolio Return||7.00%||50%|
|Expected Return||5.500%||W(Rf)* ER(Rf) +W(P)*ER(P)||[4%*50%+ 7%*50%]|
|The retun has dropped to 5.5% for complete portfolio invested equally in the risky portfolio calculated previously (a) and risk-free asset with 4% return|
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