Question

Problem 11-12 Use the following information to calculate the expected return and standard deviation of a portfolio that is 50 percent invested in 3 Doors, Inc., and 50 percent invested in Down Co.: (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) points Skipped 3 Doors Down Co. Inc. 19% 11% 39 41 Expected return, ER) Standard deviation, o Correlation 24 * eBook Print Expected return Standard deviation References

Answer 1

Investment in 3 Doors = w1 = 0.50, Investment in Down Co = w2 = 0.50

Return of 3 Doors = E(R1) = 19%

Return of Down Co = E(R2) = 11%

Expected Return = E(Rp) = w1E(R1) + w2E(R2) = 0.50*19 + 0.50*11 = 15%

Correlation = r₁₂ = 0.24

Standard Deviation of 3 Doors = σ1 = 39%

Standard Deviation of Down Co = σ2 = 41%

Standard Deviation = √ [w₁²σ₁² + w₂²σ₂² + 2w₁w₂σ₁σ₂r₁₂] = √ [0.5²0.39² + 0.50²0.41² + 2*0.50*0.50*0.39*0.41*0.24] = 0.3150 or 31.50%