Question: The expected returns and standard deviation of returns for two securities are as follows: Security A Security B Expected Return 0.15 0.35 Standard Deviation (STD)

The expected returns and standard deviation of returns for two securities are as follows:

Security A Security B

Expected Return 0.15 0.35

Standard Deviation (STD) 0.2 0.4

The correlation between the returns is + 0.25.

(a) Calculate the expected return and standard deviation for the following portfolios:

Portfolio

Expected Return

STD

All in A

0.8 in A and 0.2 in B

0.5 in A and 0.5 in B

0.2 in A and 0.8 in B

All in B

(c) Calculate the expected return and standard deviation for the following portfolios:

Portfolio

Expected Return

STD

-0.1 in A and +1.1 in B

-0.5 in A and +1.5 in B

-0.5 in B and +1.5 in A

  1. Which portfolios might be held by an investor who likes high mean and low standard deviation?
  2. What is the expected return of the minimum Variance portfolio?

  1. Now assume that the correlation between the returns of the two assets is 0. Repeat the exercise. Summarize your results.

Portfolio

Expected Return

STD

All in A

0.8 in A and 0.2 in B

0.5 in A and 0.5 in B

0.2 in A and 0.8 in B

All in B

-0.1 in A and +1.1 in B

-0.5 in A and +1.5 in B

-0.5 in B and +1.5 in A

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