1. An investor is evaluating a two asset portfolio containing the following two

Question

1. An investor is evaluating a two asset portfolio containing the following two securities:

Security Expected Return (%) Std Dev of Return (%)

Boeing (U.S.) er=18.6    stdv= 22.8

Unilever (U.K.) er= 16.0               stdv= 24.0

a. If the two securities have a correlation of +.6, what is the expected return and standard deviation of return for a portfolio that is equally weighted?

b. If the two securities have a correlation of +.6, what is the expected return and standard deviation of return for a portfolio that is 70% Boeing and 30% Unilever?

Explanation / Answer

Portfolio Standard Deviation=root(2A*2A + 2B*2B +2* A* B* A * B* correlation)
Where
A = standard deviation of asset A;
B = standard deviation of asset B; and
= correlation coefficient between returns on asset A and asset B.

A = weight of asset A in the portfolio;
B = weight of asset B in the portfolio;

Portfolio return = RA* A+ RB* B
Where
RA=return of asset a
RB=return of asset B
A = weight of asset A in the portfolio;
B = weight of asset B in the portfolio;

Answer A

Portfolio return =(0.186*0.5)+(0.16*0.5)

=17.30%

Portfolio standard deviation =(((0.5^2)*(0.228^2))+((0.5^2)*(0.24^2))+(2*0.5*0.5*0.228*0.24*0.6))^(1/2)

= 20.93%

Answer B

Portfolio return =(0.186*0.7)+(0.16*0.3)

= 17.82%

Portfolio standard deviation =(((0.7^2)*(0.228^2))+((0.3^2)*(0.24^2))+(2*0.7*0.3*0.228*0.24*0.6))^(1/2)

= 21.08%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.