Question

. LULLALLIS & QUE VI lies and standards of professional conduct. USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Asset (A) Asset (B) E(RA) = 10% E(RB) = 15% STDevA= 8% STDev B = 9.5% WA = 0.25 WB = 0.75 CovA,B = 0.006 expected return standard deviation portfolio weights covariance Refer to Exhibit7.1. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (StDev), covariance (COVi,), and asset weight (W1) are as shown above? ش 34 What is the portfolio's Expected Return? 8.79% 12.5% 13.75% 7.72% 12% نه نه ن في 35. What is the standard deviation of this portfolio? a. 8.79% 13.75% 12.5% 7.72% 5.64% نه نه ن

Answer 1

34. Calculating the expected return of portfolio:

Expected return on Portfolio = W_A*E_(RA) + W_B*E_(RB)

= (0.25)(10)+(0.75)(15)

= 13.5%

Expected Return of Portfolio = 13.75%. hence, Option C

35. Calculating Standard deviation (SD) of portfolio

Correlation of coefficient = COV_AB/SD_A*SD_B

= 0.006/0.08*0.095

= 0.7895

STANDARD DEVIATION = V(W)*(0) + (W) * (0)2 + 2WBWAO BO APAB

S.D. = V(0.75)2(9.5)2 + (0.25)2(8)2 + 2 * 0.75*0.25 * 9.5 * 8 *0.7895

S.D. = 50.7656 +4 + 22.50075 = 77.26635

S. D. = 8.79%

Hence, OPTION A