Risk & Portfolio Question
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You have decided to invest all your wealth in two mutual funds: A and B. Their returns and risks are as follows:
• the mean returns are rA = 15% and rB= 11%
• the covariance matrix is
rA rB
rA 0.04 0.025
rB 0.025 0.032
You want your total portfolio to yield a return of 12%. What proportions of your wealth should you invest in A and B? What is the standard deviation of the return on your portfolio?
(question is also included in the attached document below)
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Solution Summary
Using the mutual funds example, risk and return are found.
Solution Preview
First of all let x be the proportion of B. The expected portfolio return is:
11x + 15(1-x) = 12,
which gives x ...
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