Portfolio 1 consists of two risky assets A and B with the following characteristics E(rA) = 18%, E(rB) = 17%, A = 18% GB = 15%, AB = cov(rA, rB) = 15% The weight of the risky portfolio A = 0.80. Portfolio 2 consists of two risky assets C and D with the following characteristics E(rC) = 19%, E(rD)

 

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Portfolio 1 consists of two risky assets A and B with the following characteristics E(rA) = 18%, E(rB) = 17%, σA = 18% GB = 15%, σAB = cov(rA, rB) = 15% The weight of the risky portfolio A = 0.80. Portfolio 2 consists of two risky assets C and D with the following characteristics E(rC) = 19%, E(rD) = 16%, oC = 15%, D = 18%, o CD = cov(rC, rD) = 30% The weight of the risky portfolio XC = 0.20. Answer the following questions. 1. Compute the expected return of Portfolio 1 and Portfolio 2 2. Compute the variance of Portfolio 1 and Portfolio 2 3. Which portfolio is better?

Expert Answer

1. Expected return of Portfolio 1: E(rp1) = A * E(rA) + (1 - A) * E(rB) E(rp1) = 0.80 * 18% + 0.20 * View the full answer