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the annual expected return and standard deviation of returns for 2 assets are as

ID: 2682765 • Letter: T

Question

the annual expected return and standard deviation of returns for 2 assets are as follow:

Asset A: E[r]=10%, SD[r]=30%
Asset B: E[r]=20%, SD[r]=50%
the correlation between the returns is 0.15.

assume that the annual risk-free rate is 4%.

find the weights (T-bill, asset A, asset B) for a portfolio with the same expected return as asset B, using only a combination of the risk-free rate and the portfolio of 50% in A, 50% in B? what is the standard deviation of this portfolio? what is the correlation of this portfolio with the portfolio of 50% in risk-free asset, 50% in the portfolio of 50% in A, 50% in B?

Explanation / Answer

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