Assume a portfolio in which there is equal investment in two assets that are perfectly negatively 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

The formula for calculating portfolio return with two assets is:
Portfolio Return = (weight of Asset A x Expected Return of Asset A) + (weight of Asset B x Expected Return of Asset B)

Since the investment in both assets is equal, the weight of each asset in the portfolio is 0.5.

Portfolio Return = (0.5 x 10%) + (0.5 x 4%) = 7%

Therefore, the expected yield on this portfolio is 7 percent, which is option B.

Assume a Portfolio in Which There Is Equal Investment in Two