Ebenezer Scrooge has invested 40% of his money in share A and the remainder in s

Question

Ebenezer Scrooge has invested 40% of his money in share A and the remainder in share B. He assesses their prospects as follows:

What are the expected return and standard deviation of returns on his portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

How would your answer change if the correlation coefficient were 0 or –.3? (Round your answers to 2 decimal places.)

Ebenezer Scrooge has invested 40% of his money in share A and the remainder in share B. He assesses their prospects as follows:

Explanation / Answer

What are the expected return and standard deviation of returns on his portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Ans) Percentage of investment Rate of Return Expected Return A 0.4 13 5.2 B 0.6 23 13.8 Portfolio Rate of Return 19 Expected Rate of Return 19% If the Correlation Coefficient was0.3 0.3 Sqare Root [(SD.A^2 x WA^2)+(SD.B^2 x WB^2)+2(SDA x WA x SDB x WB x Correlation of AB) Sqare Root[(16^2 x 0.40^2)+(29^2 x 0.60^2)+2(16 x 0.40 x 29 x 0.60 x 0.3) Sqare Root[(256 x 0.16)+(841 x 0.36)+66.816) Sqare Root [ (343.72+66.816)] Sqare Root[(410.536)] Portfoli SD = 20.3 How would your answer change if the correlation coefficient were 0 or –.3? (Round your answers to 2 decimal places.) Ans) If the Correlation Coefficient was 0 0= Sqare Root[(SD.A^2 x WA^2)+(SD.B^2 x WB^2)+2(SDA x WA x SDB x WB x Correlation of AB) 0= Sqare Root[(16^2 x 0.40^2)+(29^2 x 0.60^2)+2(16 x 0.40 x 29 x 0.60 x 0) 0= Sqare Root[(256 x 0.16)+(841 x 0.36)] 0= Sqare Root[(40.96+302.76)] Sqare Root[(343.72)] Portfoli SD = 18.54 If the Correlation Coefficient was -0.3 Sqare Root[(SD.A^2 x WA^2)+(SD.B^2 x WB^2)+2(SDA x WA x SDB x WB x Correlation of AB) Sqare Root[(16^2 x 0.40^2)+(29^2 x 0.60^2)+2(16 x 0.40 x 29 x 0.60 x -0.3) Sqare Root[(256 x 0.16)+(841 x 0.36)-66.816) Sqare Root [ (343.72-66.816)] Sqare Root[ (276.904)] 16.63 Portfoli SD = 16.63

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