Question

An investor has her $1 million portfolio invested in two different mutual funds as follows: $400,000 in a small-cap fund and $600,000 in a balanced fund. The small-cap fund has an expected return of 12% and a variance of 625, whereas the balanced fund has an expected return of 7% and a variance of 81. The covariance between the two funds is 122. Find the investor’s expected portfolio return and standard deviation.

Select one:

a. Expected Return = 9.5%; standard deviation = 202.36%

b. Expected Return = 9.0%; standard deviation = 14.2%

c. Expected Return = 9.0%; standard deviation = 112.5%

d. Expected Return = 9.5%; standard deviation = 15.0%

Answer 1

EXPECTED RETURN = 9%

Investment - $ 1,000,000 Let A be investment of $400,000 in Small Cap-fund ie 0.4 of $1 million let (B' be investment of $600,000 in balanced fund. ic 0.6 of $ 1 million Return from small - cap fund = 12% Retum from balanced fund = 70% Expected yestern = 124 X0.4+ 7:4. X0:6 of Portfolio - 4. 844.2 covariance of A and B = 122 Standard deviation of portfolio = VW2 A²+W B 2 +20W,W₂ COV AB variance of 'A' = 625, variaxe of B = 8) =760.40)2(625)+(0-6)2(81) +2 (0:4) (0-6)C122). 13.70%.

STANDARD DEVIATION =13.70%

AS GIVEN QUESTION DON'T HAVE OPTION WITH STANDARD DEVIATION AS SOLVED IN GIVEN ANSWER.PLEASE FOLLOW THROUGH AS SOLUTION IS DONE ACCORDING TO STANDARD FORMULA OF PORTFOLIO THEORY