Security F has an expected return of 10.30 percent and a standard deviation of 4

Question

Security F has an expected return of 10.30 percent and a standard deviation of 43.30 percent per year. Security G has an expected return of 15.30 percent and a standard deviation of 62.30 percent per year a. What is the expected return on a portfolio composed of 33 percent of Security F and 67 percent of Security G? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return b. If the correlation between the returns of Security F and Security G is .28, what is the standard deviation of the portfolio described in part (a)? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation

Explanation / Answer

Answer (a) Expected Return of portfolio = (Rf*Wf) + (Rg*Wg)

= (10.30*0.33)+(15.30*0.67) = 3.433 + 10.20 = 13.633%

(b) Standard Deviation of Portfolio =

Variance of portfolio = (Wf)2(SDf)2 + (Wg)2(SDg)2 + 2* (Wf)(SDf)(Wg)(SDg)(COVF,g)

= (0.33)2(43.30)2 + (0.67)2(62.30)2 + 2* (0.33)(43.30)(0.67)(62.30)(0.28)

= 1874.89*0.1089 + 3881.29*0.4489 + 334.00472

= 204.1755 + 1742.312 + 334.00472 = 2280.49

There fore SD of porftfolio = (variance)1/2 = 2280.491/2 = 47.754%

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