There are two assets, L and M. Their expected returns are 12% and 8% respectively. The risk of asset L is 5% and the risk of asset M is 10%. At the present time, Francis is concerned about reducing his risk. What will be the expected return and risk of a portfolio LM if the assets are held in the following proportions?

 

Portfolio                          Asset proportion in portfolio

L           L 50%        M 50%  Correlation coefficient of   0.50

M          L 50%        M 50%  Correlation coefficient of  -0.50

Answer rating: 100% (QA)

Solution To calculate the expected return and risk of the portfolio LM we can use the following formulas Expected return of a portfolio ERp ERp wL ERL wM ERM Where ERp is the expected return of the po... View the full answer