An investor plans to invest 70 percent of her funds in the common stock of Gamma

Question

An investor plans to invest 70 percent of her funds in the common stock of Gamma Industries and 30 percent in Epsilon Company. The expected return on Gamma is 12 percent and the expected return on Epsilon is 16 percent. The standard deviation of returns for Gamma is 8 percent and for Epsilon is 12 percent. The correlation between the returns for Gamma and Epsilon is +0.8. Determine the expected return on the investor's portfolio. Show work.

13.20%                        b. 11.50%                    c. 14.25%                    d. 10.70

Explanation / Answer

Expected return of gamma = 12%, Weight of gamma = 70%

Expected return of Epsilon = 16%, Weight of epsilon = 30%

Expected return on the investors portfolio = (Expected retun of gamma*Weight of gamma) + (Expected return of epsilon*Weight of epsilon)

= (12%*70%) + (16%*30%)

= 13.2%

Ans is option a

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