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A portfolio has 25% of its funds invested in Security and 75% of its funds invested in Security D
A portfolio has 25% of its funds invested in Security and 75% of its funds invested in Security D. Security C has an expected return of 8% and a standard deviation of 6%. Security D has an expected return of 10% and a standard deviation of 10%. The securities have a coefficient of correlation of 0.6. calculate the value of the portfolio return and variance?
Expert Solution
Portfolio Return
The value of portfolio return is determined as below:
Portfolio Return = Percentage Investment in Security C*Expected Return on Security C + Percentage Investment in Security D*Expected Return on Security D
Using the values provided in the question in the above formula, we get,
Portfolio Return = 25%*8% + 75%*10% = 9.50%
_____
Portfolio Variance
The value of portfolio variance is arrived as follows:
Portfolio Variance = (Percentage Investment in Security C)^2*(Standard Deviation for Security C)^2 + (Percentage Investment in Security D)^2*(Standard Deviation for Security D)^2 + 2*Percentage Investment in Security C*Percentage Investment in Security D*Standard Deviation for Security C*Standard Deviation for Security D*Correlation Coefficient
Using the values provided in the question in the above formula, we get,
Portfolio Variance = (25%)^2*(6%)^2 + (75%)^2*(10%)^2 + 2*25%*75%*6%*10%*0.6 = 0.0072
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