Question

#2 You are evaluating a portfolio of the following two securities. British American Expected returns 12.5% 10.8 Std. dev. 26.4% 22.5 a) If the two securities had a correlation of 0.72 in 1990, what are the expected returns and Std. dev. of the portfolio consisting of 25% British and 75% American? b) If the correlation increased to 0.85 in 2000, what are the expected returns and Std. dev. of the same portfolio?

Answer 1

a . 1990's
Expected return of the portfolio= 11.225%
Standard deviation of the portfolio= 22.12%

b. 2000's
Expected return of the portfolio= 11.225%
Standard deviation of the portfolio= 22.75%

Given weigation portfolio of British = 0.25 A h American = 0.75 Expected return of Bibish CMB) = 12.5% " " " American (Sp) = 10.8%. Standastad Levitatron of British (UB)- 3647 1 American (J) - 22-54). a) Expected Reteen - weighted Average - WAVA + WBTB = 0.75(10.8) + 0.25(12-5) - 11.2257 Sta. dw of portfolio (OP) Goren correlation (2) = 0.72 WATA ²+ WBTB ²2 (WAWB) * (TATE 2) vrlossnat (OX) + 2 (0-35%0-26) x (0-72%26-4X22-5) = 22:12%

b. 2000's Expected Retren of portfolio ZWA NA TWBTB = 11-225 y. Correlation (o) = 0.85 8=0.85 Stooder of portfolio = V WARTA ² + wB²B ²+2 WA WAGAT B2) = 1 Loots x 22.5) ²+ (0.25826-4) 42 (0.25x0.75) X (26.48 22-5x 0-85) 22.75%