1. Why are bond market indices more difficult to construct and maintain than stock market indices?
2. An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. The standard deviation of returns on the stock index 6%. Calculate the expected return on the portfolio and the expected standard deviation of the portfolio.
Asset (A) Asset (B)
E(RA) = 16% E(RB) = 10%
(sA) = 9% (sB) = 7%
WA = 0.5 WB = 0.5
COVA,B = 0.0009
a. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (si), covariance (COVi,j), and asset weight (Wi) are as shown above?
b. What is the standard deviation of this portfolio?
The problem deals with portfolio analysis under finance. In the problem the expected return and standard deviation of the portfolio are determined.