An investor is evaluating a two asset portfolio containing the following two sec
ID: 2713550 • Letter: A
Question
An investor is evaluating a two asset portfolio containing the following two securities:
Security
Expected Return (%)
Std Dev of Return (%)
Boeing (U.S.)
18.6
22.8
Unilever (U.K.)
16.0
24.0
If the two securities have a correlation of +.6, what is the expected return and standard deviation of return for a portfolio that is equally weighted?
Use the formulas rp = w1r1 + w2r2 and p 2 = w1 2 1 2 + w2 2 2 2 + 2w1w2r1212 to calculate the means and standard deviations of the portfolios.
Security
Expected Return (%)
Std Dev of Return (%)
Boeing (U.S.)
18.6
22.8
Unilever (U.K.)
16.0
24.0
Explanation / Answer
where standard deviation =( w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*(RA)*(RB))^0.5
Correlation 0.6 Expected Return Weight Weight* expected return Standard Deviation Boeing (U.S.) 18.6 0.5 9.3 22.8 Unilever (U.K.) 16 0.5 8 24 Expected Return of portfolio= Sum= 17.3 Standard deviation of portfolio = 20.93132Related Questions
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