5. The expected returns and standard deviation of returns for two securities are

Question

5. The expected returns and standard deviation of returns for two securities are as follows: Security Z Security Y Expected Return 15% 35% Standard Deviation 20% 40% The correlation between the returns is + .25. (a) Calculate the expected return and standard deviation for the following portfolios: i. all in Z ii. .75 in Z and .25 in Y iii. .5 in Z and .5 in Y iv. .25 in Z and .75 in Y v. all in Y (b) Draw the investment opportunity set. (c) Which portfolios might be held by an investor who likes high mean and low standard deviation?

Explanation / Answer

SecurityZ SecurityY Expected return 15% 35% Std Deviation 20% 40% Return Std Deviation all in Z 15% 20% .75 in Z and .25 In Y 20.00% 25.00% .5 in Z and .5 In Y 25.00% 30.00% .25 in Z and .75 In Y 30.00% 35.00% allin Y 35% 40% b) c) An investor who likes high mean will keep portfolios with .75 and full investment in Y An investor who likes low SD will keep portfolios with .75 and full investment in Z

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