Question

In: Finance

Use the information in the table State Probabilty Ret(US) Ret(UK) Ret(Brazil) 1 .30 .10 .14 .06...

Use the information in the table

State	Probabilty	Ret(US)	Ret(UK)	Ret(Brazil)
1	.30	.10	.14	.06
2	.30	.08	.07	.20
3	.40	.14	.11	.06

What is the expected return of a portfolio with 25% of wealth invested in the US, and 75% invested in the UK?
What is the standard deviation of return of a portfolio with 25% of wealth invested in the US, and 75% invested in the UK?
What is the covariance of return between the US and the UK?
Can an investor obtain diversification gains by investing in both the US and the UK? Why or why not? Be sure to provide quantitative justification for your answer.

Expert Solution

a. Expected Return from US= 0.3*10%+0.3*8%+0.4*14%=11%

Expected return from UK=0.3*14%+0.3*7%+0.4*11%=10.7%

Hence, expected return of a portfolio with 25% wealth invested in the US and 75% invested in the UK=25%*11%+75%*10.7%=10.775%

b.

Hence, standard deviation of the portfolio is 3.02%

c.

Hence, covariance is 0.000433

d.

We can see that standard deviation for US and UK is 3.06% and 3.51% but the standard deviation of their portfolio is 3.02% which is less than the individual 2 security.

Hence, diversification or less risk can be obtained by investing in both the US and UK.

jeff jeffy answered 1 year ago

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