Question

State of economy	Probability	Estimated Return (Fund A)	Estimated Return (Fund B)
Great	30%	10%	25%
Average	30%	15%	11%
Poor	40%	20%	15%

If you invest $2,000 in Fund A and $8,000 in Fund B, Calculate the following:

A.Portfolio’s Standard Deviation

B. Construct the complete covariance and correlation matrixes for A&B

C. Find the minimum variance portfolio using solver and report its variance, standard Deviation and expected return

Answer 1

	Expected Return =Mean Return =SUMof ((Probability)*(Return))
	Variance of Return =Sum of(Probability* (Deviation ^2))
	Deviation =Return -Mean Return
	Standard Deviation of Return =Square Root of Variance of Return
	ANALYSIS OF FUND A
		p	R1	A1=R1*P	D1=R1-15.5	E1=(D1^2)	F1=p*E1
	State of Economy	Probability	Return(%)	Probability*Return(%)	Deviation(%)	Deviation Squared(%%)	Probability*Deviation Squared(%%)
	Great	0.3	10	3	-5.5	30.25	9.075
	Average	0.3	15	4.5	-0.5	0.25	0.075
	Poor	0.4	20	8	4.5	20.25	8.1
			SUM	15.5		SUM	17.25
	Expected Return =Mean return	15.5	%
	Variance of Return	17.25	%%
	Standard Deviation of Return =SQRT(17.25)=		4.15	%
	ANALYSIS OF FUND B
		p	R2	A2=R2*p	D2=R2-16.8	E2=(D2^2)	F2=p*E2
	State of Economy	Probability	Return(%)	Probability*Return(%)	Deviation(%)	Deviation Squared(%%)	Probability*Deviation Squared(%%)
	Great	0.3	25	7.5	8.2	67.24	20.172
	Average	0.3	11	3.3	-5.8	33.64	10.092
	Poor	0.4	15	6	-1.8	3.24	1.296
			SUM	16.8		SUM	31.56
	Expected Return =Mean return	16.8	%
	Variance of Return	31.56	%%
	Standard Deviation of Return =SQRT(31.56)=		5.62	%