Problem 11-35 Covariance and Portfolio Standard Deviation

There are three securities in the market. The following chart shows their possible payoffs:

State	Probability of Outcome	Return on Security 1	Return on Security 2	Return on Security 3
1	.16	.210	.210	.060
2	.34	.160	.110	.110
3	.34	.110	.160	.160
4	.16	.060	.060	.210

a-1.	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	%
Security 2	%
Security 3	%

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	%
Security 2	%
Security 3	%

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
Security 1 & 3
Security 2 & 3

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
Security 1 & 3
Security 2 & 3

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	%

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
Security 1 & 2	%

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	%

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	%

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	%

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	%