Brenda Weiss is a portfolio manager managing a portfolio worth $2,000,000. Being optimistic about the prospects of
Question:
Brenda Weiss is a portfolio manager managing a portfolio worth $2,000,000. Being optimistic about the prospects of the stock market in the coming months, she has borrowed $500,000 at an interest rate of 8% (0.08), and has invested this money, together with the $2,000,000 dollars that she has in two portfolios of risky securities. $1,000,000 have been invested in an S&P index fund, and the rest in a small stock fund. Brenda assesses that the expected return on the S&P fund is 13% (0.13) with standard deviation 20% (0.20), and that the expected return on the small stock fund is 18% (0.18) with a standard deviation of 25% (0.25). She also assesses the correlation coefficient between the S&P fund and the small stock fund to be 0.7. What is the expected return and standard deviation of return on Brenda's portfolio?
Valuation The Art and Science of Corporate Investment Decisions
ISBN: 978-0133479522
3rd edition
Authors: Sheridan Titman, John D. Martin