Asset(A) Estimated Return=10% Standard Deviation= 8% Asset Weight= .25 Asset(B)

Question

Asset(A)

Estimated Return=10%

Standard Deviation= 8%

Asset Weight= .25

Asset(B)

Estimated Return= 15%

Standard Deviation= 9.5%

Asset Weight= .75

Covariance =.006

What is the expected Return of a two risky asset?

a) 8.79%

b) 12.5%

c) 13.75

d) 7.72%

e) 112%

What is the standard deviation of this portfolio?

a) 8.79%

b) 13.75%

c)12.5%

d) 7.72%

e) 5.64%

I am trying to understand how the solution was gotten, I have the answers but would like the formula to get there since I am having touble understanding getting my answer.

Explanation / Answer

Portfolio Expected Return = 0.25×10%+0.75×15%

= 0.25×0.1+0.75×0.15

= 0.025+0.1125

= 0.1375 or 13.75%

Standard Deviation of Portfolio

                                      = wA2A2 wB2B2+2 wA wBcovAB

= (0.25)2×(8%)2+(0.75)2×(9.5%)2+2×0.25×0.75×0.006

= 0.625×0.064+0.5625×0.009025+0.00225

= 0.04+0.0050765625+0.00225

=0.0473265625 = 21.75%

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