A portfolio has 25% of its funds invested in Security C 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 .6.Which of the following values is closest to portfolio return and variance?
A).090; .0081
B).095; .001675
C).095; .0072
D).100; .00849
E)Cannot calculate without the number of covariance terms.

Question

Quizplus · Accepted Answer

To calculate portfolio return, we use the weighted average of the returns of Security C and Security D.

Portfolio return = (0.25 x 0.08) + (0.75 x 0.10) = 0.095 or 9.5%

To calculate portfolio variance, we need to know the covariance between the two securities. However, we can use the formula for portfolio variance without knowing the covariance term:

Portfolio variance = (0.25^2 x 0.06^2) + (0.75^2 x 0.10^2) + (2 x 0.25 x 0.75 x 0.06 x 0.10 x 0.6)

Portfolio variance = 0.0072 or 0.72% squared

Therefore, the closest answer choice is C, which gives a portfolio return of 9.5% and a portfolio variance of 0.0072 or 0.72% squared.

A Portfolio Has 25% of Its Funds Invested in Security