Suppose that you are deciding between two different investments for the coming y

Question

Suppose that you are deciding between two different investments for the coming year. The first investment is a mutual fund that consists of the stocks that comprise the Dow Jones Industrial Average. The second investment is a mutual fund that is expected to perform best when the economy is weak. Let X be the variable that corresponds to the Dow Jones fund and Y be the variable that corresponds to the weak-economy fund. The expected values and the variances for each variable and the covariance are calculated and the results are shown below.

E(X)=$85,

E(Y)=$105,

2/X=24,525, this is 2 on top of X not standard deviation 2 all over x

2/Y=21,225, same for 2/Y here

XYl=20,925 same here for X/Y

When half of the portfolio assets are invested in the Dow Jones fund and half in a weak-economy fund, the portfolio expected return is found to be

$95 and the portfolio risk is found to be $31.22.

Complete parts (a) through (c) below.

a. Recalculate the portfolio expected return and the portfolio risk if 30% of the portfolio assets are invested in the Dow Jones fund and 70% in a weak-economy fund.

The portfolio expected return is

E(P)=$______

(Type an integer or a decimal.)

Explanation / Answer

Portfolio Expected Return E(P) = 0.3*85+0.7*105 99 Portfolio Risk = square root of (w1^2*SD1^2+w2^2*SD2^2+2w1*w2*Cov (1,2) w1 = weight of Dow Jones w2 = weight of weak economy fund SD1 = Standard Deviation of Dow Jones SD2 = Standard Deviation of weak economy fund square root of (0.30*24.525+0.70*21.225+2*0.3*0.7*20.925 5.568079

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