Explore BrainMass

Explore BrainMass

    Finance: Portfolio return and risk.

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Problem 13. Security A offers an expected return of 15 percent with a standard deviation of 7 percent. Security B offers an expected return of 9 percent with a standard deviation of 4 percent. The correlation between the returns of A and B is +0.6. If an investor puts one-fourth of his wealth in A and three-fourths in B, what is the expected return and risk(standard deviation) of this portfolio?

    © BrainMass Inc. brainmass.com October 7, 2022, 6:50 pm ad1c9bdddf
    https://brainmass.com/business/beta-and-required-return-of-a-project/finance-portfolio-return-risk-393456

    SOLUTION This solution is FREE courtesy of BrainMass!

    RATE OF RETURN AND STANDARD DEVIATION

    Problem 13. Security A offers an expected return of 15 percent with a standard deviation of 7 percent. Security B offers an expected return of 9 percent with a standard deviation of 4 percent. The correlation between the returns of A and B is +0.6. If an investor puts one-fourth of his wealth in A and three-fourths in B, what is the expected return and risk (standard deviation) of this portfolio?

    TUTORIAL

    A B
    Weight 25% (A) 75% (B)
    Return 15% (C) 9% (D)
    Expected return of portfolio 10.50% =(A * C) + (B * D)

    A B
    Weight 25% 75%
    Weight^2 6% (A) 56% (D)
    Standard deviation 7% (B) 4% (E)
    Standard deviation^2 0.5% (C) 0.2% (F)
    Correlation coefficient 0.60
    Portfolio standard deviation 6.76% =√((A * C) + (D * F) + (2 * 0.60 * B * E))

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com October 7, 2022, 6:50 pm ad1c9bdddf>
    https://brainmass.com/business/beta-and-required-return-of-a-project/finance-portfolio-return-risk-393456

    Attachments

    ADVERTISEMENT