Refer to Exhibit 7.1. What is the expected return of a portfolio of two risky as

Question

Refer to Exhibit 7.1. What is the expected return of a portfolio of two risky assets if the expected return E(Ri), standard deviation (i), covariance (COVi,j), and asset weight (Wi) are as shown above?

Exhibit 7.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

Asset (A)

Asset (B)

E(RA) = 10%

E(RB) = 15%

(sA) = 8%

(sB) = 9.5%

WA = 0.25

WB = 0.75

CovA,B = 0.006

Select one:

a. 8.79%

b. 12.5%

c. 13.75%

d. 7.72%

e. 12%

Asset (A)

Asset (B)

E(RA) = 10%

E(RB) = 15%

(sA) = 8%

(sB) = 9.5%

WA = 0.25

WB = 0.75

CovA,B = 0.006

Explanation / Answer

Expected return = (E(RA)* WA)+(E(RB) *WB)

                                  = [10*.25 ] + [15 * .75]

                                 = 2.5 + 11.25

                                 = 13.75%

correct option is "C"

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