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USE THE INFORMATION BELOW FOR THE FOLLOWING Question Asset 1 Asset 2 E(R)=12 E(R2) = 16 Eſstandard dev 1) = .04 Efstandard de

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Answer #1

Expected return of two-asset portfolio Rp = w1R1 + w2R2,

where Rp = expected return

w1 = weight of Asset 1. This is 0.75

R1 = expected return of Asset 1. This is 0.12.

w2 = weight of Asset 2. This is (1 - 0.75) = 0.25.

R2 = expected return of Asset 2. This is 0.16.

Expected return = (0.75 * 0.12) + (0.25 * 0.16)  

Expected return = 0.13

Expected standard deviation for a two-asset portfolio σp = (w12σ12 + w22σ22 + 2w1w2Cov1,2)1/2

where σp = expected standard deviation of the portfolio

w1 = weight of Asset 1. This is 0.75.

w2 = weight of Asset 2. This is 0.25.

σ1 = expected standard deviation of Asset 1. This is 0.04.

σ22 = expected standard deviation of Asset 2. This is 0.06.

Cov1,2 = covariance of returns between Asset 1 and Asset 2

Cov1,2 = ρ1,2 * σ1 * σ2, where ρ1,2 = correlation of returns between Asset 1 and Asset 2

Expected standard deviation σp = ((0.752 * 0.042) + (0.252 * 0.062) + (2 * 0.75 * 0.25 * 0.60 * 0.04 * 0.06)1/2

Expected standard deviation σp = 0.0455

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