You are currently invested in two index funds, one consists of all Chinese firms and the other

Fantastic news! We've Found the answer you've been seeking!

Question:

You are currently invested in two index funds, one consists of all Chinese firms and the other all American firms. Both are considered to well represent the "Market" of their home countries. Although the correlation of these two funds has been increasing, it remains relatively small at 0.3. The Chinese Index Fund has an expected return of 9.6% with a standard deviation of 40%. The American Index Fund has an expected return of 8.4% with a standard deviation of 25%. Index funds are investment funds that follow a benchmark index, such as the S&P 500 or the Nasdaq 100. When you put money in a an index fund, that cash is then used to invest in all the companies that make up the particular index, which gives you a more diverse portfolio than if you were buying individual stocks. a) What is the expected return and standard deviation of your portfolio returns if you have 350,000 invested in the Chinese fund and 750,000 invested in the American fund?

b) You are considering adding a newly listed biotech startup (not in the American Index fund) with some "fun" money. You've mapped out what you consider the only two scenarios for this company. The current stock price for the startup is $47/share.

There is a 30% probability that the FDA will approve the drug, if so the share price will be $210.00.

There is a 70% probability that the FDA will reject the drug, if so the share price will be $1.00.

What is the expected return and standard deviation of returns for the startup?

c) The returns of both index funds have no correlation with the FDA's decision. If you invest $30,000 of new "fun money" in this company, what is the expected return and standard deviation of your TOTAL portfolio? Note: This can still be solved as a two-asset portfolio, if you use your answers from a) as one asset.

d) The returns of both index funds have no correlation with the FDA's decision. According to the CAPM, what would be the required return of the startup in your diversified portfolio. You have just looked up the risk free rate and found it to be 4%.