Assume a portfolio in which there is equal investment in two assets that are perfectly positively correlated, with equally expected returns of 10 percent and 6 percent for asset A and 8 percent and 4 percent for asset B. The expected yield on this portfolio is
A) 8 percent.
B) 7 percent.
C) 6 percent.
D) 5 percent.

Question

Quizplus · Accepted Answer

To calculate the expected yield of a portfolio with two assets, we use the formula:

Expected yield = Weighted average return of asset A + Weighted average return of asset B

Since the portfolio is equally invested in asset A and asset B, the weights are 0.5 for each. Therefore, the expected yield is:

Expected yield = 0.5(10% + 8%) + 0.5(6% + 4%) = 7%

Therefore, the best choice is B, as this is the expected yield of the portfolio.

Assume a Portfolio in Which There Is Equal Investment in Two