Use the table for the question(s) below. Consider the following expected returns

Question

Use the table for the question(s) below.

Consider the following expected returns, volatilities, and correlations:

The expected return of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

a.12%

b.27%

c.18%

d.21%

Stock Expected Return Standard Deviation Correlation with Duke Energy Correlation with Microsoft Correlation with Wal-Mart Duke Energy 14% 6% 1.0 -1.0 0.0 Microsoft 44% 24% -1.0 1.0 0.7 Wal-Mart 23% 14% 0.0 0.7 1.0

Explanation / Answer

Expected Return = w E( R) (10000/8000*0.23) + (-2000/8000*0.44) 0.1775 17.75% Rounding off would give 18% The expected return of a portfolio would be 18%

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