33. Suppose we obtain the following data in dollar terms: Standard deviation of

Question

33. Suppose we obtain the following data in dollar terms: Standard deviation of monthly return 4.43% 5.55% Stock market Average return 1.26% per month 1.23% per month United States United Kingdom The correlation coefficient between the two markets is 0.58. Suppose that you invest 60% in the U.S. market and 40% in the UK market, the expected monthly return and standard deviation of the return are: A. 1.24% and 23.79%, respectively. B. 1.25% and 4.44%, respectively C. 1.25% and 5.10%, respectively. D. 1.26% and 26.03%, respectively

Explanation / Answer

Average Return Standard deviation of monthly return United States 1.26% 4.43% United Kingdom 1.23% 5.55% Correlation Coefficient - 0.58 If 60% is invested in U.S. market and 40% invested in U.K. Market Monthly Return of Portfolio 1.26*(0.60) + 1.23(0.40) Monthly Return of Portfolio                                            1.25 Variance of portfolio (60^2)(4.43^2) + (40^2)(5.55^2) + 2(60)(40)(4.43)(5.55)(0.58) 70649.64+49284+68448.82 188382.50^0.50 434.0305289 Standard deviation of portfolio 4.340305289

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