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Security Expected Return and Standard Deviation

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You are planning to form a portfolio with two securities, the details of which are as follows:

Security Expected Return Standard Deviation
1 12% 4%
2 10% 3%

Assume that the returns on these two securities are perfectly negatively correlated. Calculate portfolio expected return and variance for different combinations of these two securities and draw the efficient frontier. If you require an expected return of 11%, calculate the standard deviation of your portfolio.

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Solution Summary

This solution calculates the expected return and standard deviation for a portfolio.

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To calculate the expected return of a portfolio of two risky assets the following formula is used:
E(R_p) = w_1 + r_1 + w_2 + r_2

To calculate the variance of a portfolio of two risky assets the following formula is used:
omega^2_p = w^2_1 * ...

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