You have $420,000 invested in a well-diversified portfolio. You inherit a house
ID: 3049536 • Letter: Y
Question
You have $420,000 invested in a well-diversified portfolio. You inherit a house that is presently worth $180,000. Consider the summary measures in the following table:
The correlation coefficient between your portfolio and the house is 0.36
What is the expected return and the standard deviation of your portfolio comprising your old portfolio and the house? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Expected return %
Standard deviation %
Suppose you decide to sell the house and use the proceeds of $180,000 to buy risk-free T-bills that promise a 9% rate of return. Calculate the expected return and the standard deviation of the resulting portfolio. (Hint: Note that the correlation between any asset and the risk-free T-bills is zero.) (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Investment Expected Return Standard Deviation Old portfolio 8% 16% House 15% 23%The correlation coefficient between your portfolio and the house is 0.36
a.What is the expected return and the standard deviation of your portfolio comprising your old portfolio and the house? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Expected return %
Standard deviation %
b.Suppose you decide to sell the house and use the proceeds of $180,000 to buy risk-free T-bills that promise a 9% rate of return. Calculate the expected return and the standard deviation of the resulting portfolio. (Hint: Note that the correlation between any asset and the risk-free T-bills is zero.) (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Expected return % Standard deviation %Explanation / Answer
w1=weight of portfolio=420/600=0.7
w2=weight of house=0.3
a) Mean = 0.7*8+0.3*15=10.1
Standard deviation = sqrt( 0.7^2*0.16^2+0.3^2*0.23^2+2*0.7*0.3*0.16*0.23*0.36)=0.1512=15.12%
b) Mean =0.7*8+0.3*9=8.3
Standard deviation = 0.7*0.16=0.112=11.2%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.