Problem 11-35 Covariance and Portfolio Standard Deviation There are three securities in the market.

State	Probability	Return on Security 1	Return on Security 2	Return on Security 3
	of Outcome
1	0.14	0.208	0.208	0.058
2	0.36	0.158	0.108	0.108
3	0.36	0.108	0.158	0.158
4	0.14	0.058	0.058	0.208

What is the expected return of each security? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) Expected return: Security 1 = 13.30 % Security 2 = 13.30 % Security 3 = 13.30 % a-2. What is the standard deviation of each security? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) Standard deviation Security 1 = 4.50 % Security 2 = 4.50 % Security 3 = 4.50 % b-1. What are the covariances between the pairs of securities? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 5 decimal places (e.g., 32.16161).) Covariance Security 1 & 2 = .00113 Security 1 & 3 = -.00203 Security 2 & 3 = -.00113 b-2. What are the correlations between the pairs of securities? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 4 decimal places (e.g., 32.1616). Correlation Security 1 & 2 = .5556 Security 1 & 3 = -1.0000 Security 2 & 3 = -.5556 c-1. What is the expected return of a portfolio with half of its funds invested in Security 1 and half in Security 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Expected return Security 1 & 2 = 13.30 %

c-2. What is the standard deviation of a portfolio with half of its funds invested in Security 1 and half in Security 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Standard deviation ecurity 1 & 2 = 21.88 % d-1. What is the expected return of a portfolio with half of its funds invested in Security 1 and half in Security 3? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Expected return Security 1 & 3 = 13.30 %

d-2. What is the standard deviation of a portfolio with half of its funds invested in Security 1 and half in Security 3? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)) Standard deviation Security 1 & 3 = 21.46 % e-1. What is the expected return of a portfolio with half of its funds invested in Security 2 and half in Security 3? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Expected return Security 2 & 3 = 13.30 % e-2. What is the standard deviation of a portfolio with half of its funds invested in Security 2 and half in Security 3? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Standard deviation Security 2 & 3 = 21.56 %