Question: 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

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

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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 full answer

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