Two Liberty Geico .12 .16 .08 .20 Bernadette Marianne Rostenkowski is considerin

Question

Two Liberty

Geico

.12

.16

.08

.20

Bernadette Marianne Rostenkowski is considering investing in the common stock of Two Liberty and Geico. The following data are available for these two securities:

Two Liberty

Geico

Expected return

.12

.16

Standard deviation of returns

.08

.20

If she invests 30% of her funds in Geico and 70% in Two Liberty, and if the correlation of returns between these securities is +0.65, what is the portfolio's standard deviation?        15.67%
       9.44%
       10.54%
       9.67%
       8.23%

Explanation / Answer

ANS:15.67%

E(R)=WTwo liberty*E(RTWo liberty)+WGeico*E(RGeico)

E(R)=0.3(0.12)+0.7*(0.16)

        =0.148 or 14.8%

(Standard deviation)^2 =(0.3)^2(0.08)^2+(0.2)^2(0.7)^2+2(0.3)(0.7)(0.08)(0.2)(0.65)

=0.000576+0.0196+0.004368

SD(r)=sqrt of 0.0244544

          =0.1566 or 15.66%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.