Please answer with work provided. Thumbs up only if answers are correct. Thanks

Question

Please answer with work provided. Thumbs up only if answers are correct. Thanks

You have $360,000 invested in a well-diversified portfolio. You inherit a house that is presently worth $240,000. Consider the summary measures in the following table: Investment Old portfolio House Expected Return Standard Deviation 6% 14% 15% 21% The correlation coefficient between your portfolio and the house is 0.36. a. What is the expected return and the standard deviation of your portfolio comprising your old portfolio and the house? (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Expected return Standard deviation b. Suppose you decide to sell the house and use the proceeds of $240,000 to buy risk-free T-bills that promise a 12% rate of return. Calculate the expected return and the standard deviation of the resulting portfolio. (Hint: Note that the correlation between any asset and the risk-free T-bills is zero.) (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Expected return Standard deviation

Explanation / Answer

Solution:

w1= weight of portfolio = 360/600 = 0.6

w2 = weight of house = 0.4

a) Expected Return = 0.6*6+0.4*14 = 9.2

Standard deviation = sqrt( 0.6^2*0.15^2+0.4^2*0.21^2+2*0.6*0.4*0.15*0.21*0.36) = 0.1435 = 14.35%

b) Expected Return =0.6*8+0.4*12 = 9.6

Standard deviation = 0.6*0.15 = 0.09 = 9%

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