Question

You are considering investing in two securities, X and Y. The following data are available for the two securities: Security X Security Y Expected return 0.09 0.02 Standard deviation of returns 0.04 0.06 Beta 1.00 0.85 Round your answers to two decimal places. If you invest 40 percent of your funds in Security X and 60 percent in Security Y and if the correlation of returns between X and Y is +0.45, compute the following: The expected return from the portfolio: % The standard deviation of returns from the portfolio: % What happens to the expected return and standard deviation of returns of the portfolio in Part a if 70 percent of your funds are invested in Security X and 30 percent of your funds are invested in Security Y? The expected return from the portfolio: % The standard deviation of returns from the portfolio: % What happens to the expected return and standard deviation of returns of the portfolio in Part a if the following conditions exist? The correlation of returns between Securities X and Y is +1. The expected return from the portfolio: % The standard deviation of returns from the portfolio: % The correlation of returns between Securities X and Y is 0. The expected return from the portfolio: % The standard deviation of returns from the portfolio: % The correlation of returns between Securities X and Y is -0.9. The expected return from the portfolio: % The standard deviation of returns from the portfolio: %

Answer 1