There are 2 assets. Asset 1: Expected return 7.5%, standard deviation 9% Asset 2: Expected return...

There are 2 assets. Asset 1: Expected return 7.5%, standard deviation 9% Asset 2: Expected return 11%, standard deviation 12%, correlation with asset 1 is 0.4 You hold 30% of your portfolio in asset 1 and 70% in asset 2. a) (1 point) What is the expected return of your portfolio? b) (1 point) What is the covariance between assets 1 and 2? c) (1 point) What is the standard deviation of your portfolio?

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Expert Solution

a) Expected Return of Portfolio =Weight of Asset 1*Return of Asset 1+Weight of Asset 2*Return of Asset 2
=30%*7.5%+70%*11% =9.95%

b) Covariance =Standard Deviation of Asset 1*Standard Deviation of Asset 2*Correlation =9%*12%*0.4=0.00432

c) Standard Deviation =((Weight of Asset 1*Standard Deviation of Asset 1)^2+((Weight of Asset 1*Standard Deviation of Asset 2)^2+2*Weight 1*Weight 2*Standard Deviation of Asset 1*Standard Deviation of Asset 2*Correlation)^0.5
=((30%*9%)^2+(70%*11%)^2+2*30%*70%*9%*11%*0.4)^0.5=9.12%

jeff jeffy answered 1 year ago

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