3.1. Cameron Company has made a portfolio of these three securities: Security Co
ID: 2710386 • Letter: 3
Question
3.1. Cameron Company has made a portfolio of these three securities:
Security
Cost
E(R)
(R)
Treasury bond
$25,000
6%
0
Brown Corporation
$35,000
15%
35%
Blair Company
$40,000
18%
45%
The correlation coefficient between Brown and Blair is 0.5.
(A) Find the expected return of the portfolio and its standard deviation.
E(Rp) = 13.95%, (Rp) = 26.35%
(B) If the returns are normally distributed, find the probability that the return of the portfolio is more than 15%. Prob(Rp > 15%) 48.41%
Security
Cost
E(R)
(R)
Treasury bond
$25,000
6%
0
Brown Corporation
$35,000
15%
35%
Blair Company
$40,000
18%
45%
Explanation / Answer
Answer:(A)
Calculation of the standard deviation of the portfolio:
=[(0.35)2*(35%)2+(0.40)2*(45%)2+2*0.35*0.40*35%*45%*0.5]1/2
=(150.0625+324+220.5]1/2
=26.35%
Security Cost E(R) (R) Weight E(Rp) Treasury bond $25,000 6% 0 0.25 1.5 Brown Corporation $35,000 15% 35% 0.35 5.25 Blair Company $40,000 18% 45% 0.4 7.2 Total $100,000 13.95Related Questions
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