You have $360,000 invested in a well-diversified portfolio. You inherit a house

Question

You have $360,000 invested in a well-diversified portfolio. You inherit a house that is presently worth $230,000. Consider the summary measures in the following table Investment Old portfolio House Expected R eturn Standard Deviation 5% 13% 18% 23% The correlation coefficient between your portfolio and the house is 0.44. a. What is the expected return and the standard deviation of your portfolio comprising your old portfolio and the house? (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Expected return 8.73 % Standard deviation 16.96 % b. Suppose you decide to sell the house and use the proceeds of $230,000 to buy risk-free T-bills that promise a 8% rate of return. Calculate the expected return and the standard deviation of the resulting portfolio. (Hint. Note that the correlation between any asset and the risk-free T-bills is zero.) (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Expected return 6.78 % Standard deviation

Explanation / Answer

b)Expected retunr = 36/59*6+23/59*8= 6.779

Expected standard deviation = 360000/590000*18%+23/59*0=10.983

Rest of the parts have been solved correctly

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