# Portfolio-Expected return, Covariance between Funds, Risk

You are trying to set up a portfolio that consists of a corporate bond fund and a common stock fund. the following information about the annual return (per $1,000)of each of these investments under different economic condition is available, along with probability that each of these economic conditions will occur:

probability economic corporate common

conditions bond fund stock fund

0.10 Recession -$30 -$150

0.15 Stagnation 50 -20

0.35 Slow growth 90 120

0.30 Moderate growth 100 160

0.10 High growth 110 250

Compute the covariance of the corporate bond fund and the common stock fund.

(I need detail calculation and explanation.)

Suppose that you wanted to create a portfolio that consists of a corporate bond fund and a common stock fund. Compute the portfolio expected return and portfolio risk for each of the following percentages invested in a corporate bond fund:

a. 30% b. 50% c. 70%

d. on the bases of the results of (a) through (c), which portfolio would you recommended? Explain.

(I need a detail calculation and explanation for - Computation the portfolio expected return and portfolio risk for each of the following percentages invested in a corporate bond fund)

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#### Solution Summary

The Expected return of a portfolio comprising stock fund and bond fund, Covariance between the Funds, and the Risk of the portfolio are calculated.

Assets: Minimum Variance Portfolio; Yield Expected Return

Questions

Assume that there are three assets available. A is a risk-free asset with that yields a rate of 8%. The other two assets, B and S are risky asset with the following attributes.

Asset Expected Return Standard deviation

A

B 12% 15%

S 20% 30%

Correlation between assets B and S is 0.1.

Question 1:

To determine the investment proportions in the minimum-variance portfolio of the two risky assets, the expected value and standard deviation of its rate of return. I did the following : {see attachment}

Question 2:

To draw the investment opportunity set of the two risky funds. I used investment proportions for the stock funds of zero to 100% in increments of 20%.

Tabulate the investment opportunity set of the two risky funds {see attachment}

Draw the investment opportunity set of the two risky funds {see attachment}

Question 3:

If using only risky assets S, and B, to set up portfolio to yield an expected return of 14%, I did the following {see attachment}

Question 4:

Using all three assets A, B, and S, how can I set up portfolio to yield an expected return of 14%? What would be the standard deviation this portfolio? What proportion of each asset invested?

Question 5:

Assuming the borrowing is not allow, to construct a portfolio of only risky assets S, and B, with an expected return of 24%. What would be appropriated portfolio proportions? Consequently, what are their standard deviations? If the borrowing is allowed at the risk free rate, how much less the standard deviation would be?