Question: 2. Mr. Brown would like to create a portfolio that is composed of Asset 1 and Asset 2. The correlation coefficient of Asset 1 and

2.

Mr. Brown would like to create a portfolio that is composed of Asset 1 and Asset 2.

The correlation coefficient of Asset 1 and Asset 2 is .70.

You are given the following information about Asset 1 and Asset 2.

E(R1) = 0.12 E(s1) = 0.04

E(R2) = 0.16 E(s2) = 0.06

Mr. Brown is considering three possible combinations of Asset 1 and Asset 2.

Option 1 : w1 = 0.75 w2 = 0.25

Option 2 : w1 = 0.50 w2 = 0.50

Option 3 : w1 = 0.25 w2 = 0.75

  1. Calculate the expected return and the standard deviation for each option.

Show your calculations.

  1. Mr. Brown has only Option 1, Option 2 and Option 3 available to him.

What will determine Mr. Browns choice among these three options? Explain.

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