Question

Assume that you are holding a well-diversified portfolio in which the expected returns on your portfolio resemble the expected market returns in the last problem. If you add CRU to your investment portfolio, the new portfolio will be comprised of 20% ofCRU and 80% of the old portfolio. What is the new portfolio's expected return? If you added WT instead of CRU, what would be the expected return on the portfolio? 9.52%: 9.44%

Answer 1

State Probe 1 0.2 CRUCX) -157 (x-7) ² 695 Prob. (x-7. 125 3 0.2 35 625 125 A [Echected Retun X = EL ALS of CRU = {(x. Prob) = 0.2X (-15) + 0.68 lot 0 2x35 = -3 + 6+ 7 = | 107 St.deviation of CRU = {(x-B)? Psob) J 250 -15.817)

Prol 10-2 10.6 10.2 WICY - 424 32.4 122 .4 -30 39.6 LY-T2 Prob. (y-72 1049.76 209.952 5.76 3.456 1568, 16 313.632 5 PST-00 527.04 Bebected Return of WT-(02X42)+(0.6x13) +6022x - 30 - 9-64. Std. deviation of WI -552704 7 = 22.9577 - 22.967 or

Prob Market (2) CZ-Z) (2-2) ² Prob- (2-2) 0.2 - 87 - 17.4 302.76 GO. 552. 0.6 10 0.6 0.36 0.1296 0.2 25 15.6 24.36 48.672 109.3536 Puhected Return of MATH = (-8 x0.2) +C10X0-6) + Con 28252 -1.6+6+5 = 9.47. Masket Std. deviation of Market = 109.3536 - 100457 00 = 10.467

Eebected Return Weight old Pooffolio g.4 0.8 2 CRU 1 0 0.2 - Expected Return of new Portfolio IR Weight 1 old Poolfolio g.4 0.8 WI 9.6 0.2 ER RxW 7.52 2 9.52%. RAW 7.52 1.92 9.447.