An investor plans to invest 75% of her funds in the common stock of Gamma Industries and 25% in Epsilon Company. The expected return on Gamma is 12%, and the expected return on Epsilon is 16%. The standard deviation of returns for Gamma is 8% and for Epsilon is 12%. The correlation between the returns for Gamma and Epsilon is +0.8. Determine the expected return on the investor's portfolio.

Question

Quizplus · Accepted Answer

The expected return on the portfolio is calculated as follows:

Expected return on portfolio = (weight of Gamma * expected return of Gamma) + (weight of Epsilon * expected return of Epsilon)

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

= 0.09 + 0.04

= 0.13 or 13%.

Therefore, the expected return on the investor's portfolio is 13%.

An Investor Plans to Invest 75% of Her Funds in the Common