# Finance: Portfolio return and risk.

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?

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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% =âˆš((A * C) + (D * F) + (2 * 0.60 * B * E))

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