The table below shows summary statistics for two assets, A and B . Asset A Asset

Question

The table below shows summary statistics for two assets, A and B.

Asset A

Asset B

Expected Return

0.08

0.16

Std Deviation

0.08

0.25

Assuming the correlation coefficient between the funds is 0.40, produce the covariance matrix for the two assets, and use the bordered-multiplied covariance matrix method to calculate the variance and standard deviation for a portfolio containing 50% Asset A and 50% Asset B. Also compute the expected return for this portfolio.

Asset A

Asset B

Expected Return

0.08

0.16

Std Deviation

0.08

0.25

Explanation / Answer

Let the X be the return from Asset A and Y be the return from Asset B

The expected return for this portfolio is

E(X+Y) = E(X) + E(Y) = 0.08+0.16 = 0.24

Var(X+Y) = Var(X) + Var(Y) + 2r SD(X) SD(Y)

= 0.50 + 0.50 + 2 *0 40*sqrt(0.50)*sqrt(0.50)

= 1.4

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