Question 8. Zadie has invested 20% of her funds in Treasury bills and 80% in an

Question

Question 8. Zadie has invested 20% of her funds in Treasury bills and 80% in an “index fund” that represents all U.S. common stocks. The rate of return of an investment over a time period is the percent change in the price during the time period, plus any income received. If X is the annual return on T bills and Y the annual return on stocks, the portfolio rate of return is: R = 0.2X + 0.8Y The returns X and Y are random variables because they vary from year to year. Based on annual returns between 1950 and 2003, we have X = annual return on T-bills    mean X = 5.0%; std. dev. X = 2.9% Y = annual return on stocks     mean Y = 13.2%; std. dev. Y = 17.6% Correlation between X and Y    rho = -0.11 a) What is the expected return R on Zadie’s portfolio of 20% T-bills and 80% stocks? (5 pts.) Question 8. Zadie has invested 20% of her funds in Treasury bills and 80% in an “index fund” that represents all U.S. common stocks. The rate of return of an investment over a time period is the percent change in the price during the time period, plus any income received. If X is the annual return on T bills and Y the annual return on stocks, the portfolio rate of return is: R = 0.2X + 0.8Y The returns X and Y are random variables because they vary from year to year. Based on annual returns between 1950 and 2003, we have X = annual return on T-bills    mean X = 5.0%; std. dev. X = 2.9% Y = annual return on stocks     mean Y = 13.2%; std. dev. Y = 17.6% Correlation between X and Y    rho = -0.11 a) What is the expected return R on Zadie’s portfolio of 20% T-bills and 80% stocks? (5 pts.)

Explanation / Answer

R = 0.2 * X + 0.8 * Y

Hence, Expected Return would be:

E(R) = 0.2 * E(X) + 0.8 * E(Y)

Now, E(X) = 5% and E(Y) = 13.2% , as given.

Hence, E(R) = 0.2*5% + 0.8 * 13.2% = 1.0% + 10.56% = 11.56%

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.