Christy is considering investing in the common stock of One Liberty and Heico. The following data are available for these two securities:
If she invests 30% of her funds in Heico and 70% in One Liberty, and if the correlation of returns between these securities is +0.65, what is the portfolio's expected return and standard deviation?
A) 14% and 15.67%
B) 14.8% and 9.44%
C) 13.2% and 10.54%
D) 13.1% and 9.67%

Question

Christy is considering investing in the common stock of One Liberty and Heico. The following data are available for these two securities: 
If she invests 30% of her funds in Heico and 70% in One Liberty, and if the correlation of returns between these securities is +0.65, what is the portfolio's expected return and standard deviation?
A) 14% and 15.67% 
B) 14.8% and 9.44% 
C) 13.2% and 10.54% 
D) 13.1% and 9.67%

Quizplus · Accepted Answer

Solution: R_p = 0.3(0.16) + 0.7(0.12) = 0.132 or 13.2% σ_p= [0.3²(0.20)² + 0.7²(0.08)² + 2(0.3)(0.7)(0.08)(0.20)(0.65)].⁵ = 0.1054 or 10.54%

Christy Is Considering Investing in the Common Stock of One